Anyone else bearish on REITS?

[IHateMyJob2004]

I have started buying put options against them. So far, I have some against EOP and EQR.

I think REITS could drop over 50% in some cases. It's like the tech boom all over again. 3% yields should not be the norm when it comes to REITS.

Thoughts anyone?

 

[Slew Foot]

I bought puts against home builders early this year. Did absolutely great, they bounced a bit the last few weeks, but theyll tank again soon. I think the mortgage banking industry is ripe for shorting as well.

 

[Midlander]

I wouldn't touch REITS right now except to short them. They've had an incredible run for over 5 years. There's a lot of hurt coming.

 

[IHateMyJob2004]

Originally posted by: Slew Foot
I bought puts against home builders early this year. Did absolutely great, they bounced a bit the last few weeks, but theyll tank again soon. I think the mortgage banking industry is ripe for shorting as well.

Home Builders! Damn, that was a good idea several months ago. Good work!!! I've missed to many opportunities in the past where I've thought about buying a good amount of puts. Yesterday I pulled the trigger for the first time ever. I usually do naked puts and the ocasional call purchase, but that's about it. And yes, I know the risks of naked puts. It's worked out great over the past 3 years though, in good times and bad. I simply use vluation in my decision making.

I'd be careful about the mortgage lenders though. There PEs and other metrics don't necessarily imply that they are grossly overvalued. I think shorting mortgage lenders might be a bit risky. Well, any particular stocks? I'm kinda curious now.

My biggest regret is not shorting NetFlix at $35+ via put purchases. It tanked to something like $15 in a matter of months. The only reason I didn't buy puts is that I stopped watching the stock for 1-2 weeks as it peaked at $36 at one time. DOH!

 

[IHateMyJob2004]

Originally posted by: Midlander
I wouldn't touch REITS right now except to short them. They've had an incredible run for over 5 years. There's a lot of hurt coming.

Most agree ......

There's alot of arguments out there. Occupancy rates are not that bad, etc.

Well, EOP reduced their dividend 3 quarters ago anf EQR hasn't increaed it's paout since 2001! If they slip .... so will their dividend.

 

[IHateMyJob2004]

morning bump jsut to see if there are any other opinions out there.

 

[Midlander]

Originally posted by: IHateMyJob2004
morning bump jsut to see if there are any other opinions out there.

Nope. Same opinion I had last night.

 

[iversonyin]

These guys are getting a little overbought here. The valuation is way out of line. But then again, renting out real estates has always been profitable since rent prices has nothing to do with the real estate price.(rent usually doesn't fall because the value of the properties fall)

P/E of 80+ for EOP....For me, they have to grow at 40-50% to justify that kind of premium. And no companies can keep growing at 40-50% for long.

EDIT: 98.5% if float held by insitutions....unless some of these guys start dumping...the price of these REITS shouldn't be falling as rapidly....its not alot of supply of these stocks out there.

 

[IHateMyJob2004]

Originally posted by: iversonyin
These guys are getting a little overbought here. The valuation is way out of line. But then again, renting out real estates has always been profitable since rent prices has nothing to do with the real estate price.(rent usually doesn't fall because the value of the properties fall)

P/E of 80+ for EOP....For me, they have to grow at 40-50% to justify that kind of premium. And no companies can keep growing at 40-50% for long.

EDIT: 98.5% if float held by insitutions....unless some of these guys start dumping...the price of these REITS shouldn't be falling as rapidly....its not alot of supply of these stocks out there.

I know a guy near retirement that has moved accross the US based on where the housing cost/rent ratio was best. He laughs because a run up in home prices always occurs.

He's done this several times. He just left Vermont last year. I forget where he is heading now.

Anyways, there is no correlation ... but corrections do occur if you consider the ratios accross the US and what the average ration in the US is.

PEs in REITS are not as important as things like FFO, but if these stocks are trading as though yields are not important anymore and therefore they are being traded as "normal" stocks, the PE indeed makes no sense.

As for the float, I think it's a useless measure. The whole supply/demand thing is kinda stupid when applied to stocks. You are buying part ownership in a company, you are not buying rare coins. Point being, stocks have a value that is rational to pay.

When I think of REIT prices right now, I am reminded of the following:

Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - source

 

[iversonyin]

Originally posted by: IHateMyJob2004

Originally posted by: iversonyin
These guys are getting a little overbought here. The valuation is way out of line. But then again, renting out real estates has always been profitable since rent prices has nothing to do with the real estate price.(rent usually doesn't fall because the value of the properties fall)

P/E of 80+ for EOP....For me, they have to grow at 40-50% to justify that kind of premium. And no companies can keep growing at 40-50% for long.

EDIT: 98.5% if float held by insitutions....unless some of these guys start dumping...the price of these REITS shouldn't be falling as rapidly....its not alot of supply of these stocks out there.

I know a guy near retirement that has moved accross the US based on where the housing cost/rent ratio was best. He laughs because a run up in home prices always occurs.

He's done this several times. He just left Vermont last year. I forget where he is heading now.

Anyways, there is no correlation ... but corrections do occur if you consider the ratios accross the US and what the average ration in the US is.

PEs in REITS are not as important as things like FFO, but if these stocks are trading as though yields are not important anymore and therefore they are being traded as "normal" stocks, the PE indeed makes no sense.

As for the float, I think it's a useless measure. The whole supply/demand thing is kinda stupid when applied to stocks. You are buying part ownership in a company, you are not buying rare coins. Point being, stocks have a value that is rational to pay.

When I think of REIT prices right now, I am reminded of the following:

Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - source

I don't see why float doesn't matter. People said stocks are not like rare coins...well indeed..its actually very similar....why? because it is a piece of paper...and value by people in the market. Similar to rare coins value by people who are willing to pay for it.

The only difference is that the value of the corporation under is worth "something" and thats what people place their judgement on...and it is often people in the market decide how much they want to pay for this piece of paper. And if 98.5% of insitutions hold the supply of the stocks, how is it suppose to come down without any of them selling it? Price is driven by people, not value. Someone has to willing to sell at a lower price for the stock price to come down.

I admire Buffet myself, but the man hasn't been always right.

BTW, what is the expiration date on the options? I think I would just short it out right.

EDIT: Ohh man, let me give you the bullish side of these things....The value of properties sitting on their books might be way under market value...so I see why these things are trading in such huge premium. Also, if properties value is coming down, but rent isn't...these guys are effectly making a bigger margin....buying properties at a lower price and renting it out at the same price level before the slowdown. + Commercial real estates usually don't flucuate as much as residential in recent downturn.

 

[IHateMyJob2004]

Originally posted by: iversonyin

Originally posted by: IHateMyJob2004

Originally posted by: iversonyin
These guys are getting a little overbought here. The valuation is way out of line. But then again, renting out real estates has always been profitable since rent prices has nothing to do with the real estate price.(rent usually doesn't fall because the value of the properties fall)

P/E of 80+ for EOP....For me, they have to grow at 40-50% to justify that kind of premium. And no companies can keep growing at 40-50% for long.

EDIT: 98.5% if float held by insitutions....unless some of these guys start dumping...the price of these REITS shouldn't be falling as rapidly....its not alot of supply of these stocks out there.

I know a guy near retirement that has moved accross the US based on where the housing cost/rent ratio was best. He laughs because a run up in home prices always occurs.

He's done this several times. He just left Vermont last year. I forget where he is heading now.

Anyways, there is no correlation ... but corrections do occur if you consider the ratios accross the US and what the average ration in the US is.

PEs in REITS are not as important as things like FFO, but if these stocks are trading as though yields are not important anymore and therefore they are being traded as "normal" stocks, the PE indeed makes no sense.

As for the float, I think it's a useless measure. The whole supply/demand thing is kinda stupid when applied to stocks. You are buying part ownership in a company, you are not buying rare coins. Point being, stocks have a value that is rational to pay.

When I think of REIT prices right now, I am reminded of the following:

Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - source

I don't see why float doesn't matter. People said stocks are not like rare coins...well indeed..its actually very similar....why? because it is a piece of paper...and value by people in the market. Similar to rare coins value by people who are willing to pay for it.

The only difference is that the value of the corporation under is worth "something" and thats what people place their judgement on...and it is often people in the market decide how much they want to pay for this piece of paper. And if 98.5% of insitutions hold the supply of the stocks, how is it suppose to come down without any of them selling it? Price is driven by people, not value. Someone has to willing to sell at a lower price for the stock price to come down.

I admire Buffet myself, but the man hasn't been always right.

BTW, what is the expiration date on the options? I think I would just short it out right.

EDIT: Ohh man, let me give you the bullish side of these things....The value of properties sitting on their books might be way under market value...so I see why these things are trading in such huge premium. Also, if properties value is coming down, but rent isn't...these guys are effectly making a bigger margin....buying properties at a lower price and renting it out at the same price level before the slowdown. + Commercial real estates usually don't flucuate as much as residential in recent downturn.

The point about rare coins is the same as what Buffett said about gold. It has no practical use. People assign it a value for a reason. In the case of rare coins, people tend to buy them because they expect the next guy to pay more. It's called greater fool theory. People seem to be buying REITS expecting a greater fool to buy it for more later. That's the implication I was trying to make.

You can actually see the mentality of the people in REITS now if you go to the yahoo finance boards. 5 years ago, it was a bunch of people laughing at the yields they are getting and how undervalued REITS were. Now it's a bunch of people pumping the stock with no supporting logic. Just like tech 5 years ago. Those are the buyers these days.

Some REITS are safer. But a rising/reciding tide theory will hurt them to. Reality Income Corp ('O') is a decent one. 6% yield and monthly dividends. And they do commercial (acutally it might be industrial) rentals with leases of 10+ years. They get slower growth, but they also get some serious consistancy. I can see that one hitting a 9% or 10% yield once things correct though. I sold off 'O' about a month ago.

I bought the following puts for $0.15 each:
EQR Dec 45 Put
EOP Apr 30 Put

Your EDIT made some good points.

 

[iversonyin]

Looks like 1 down, 1 to go.