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Today's Lesson: Avoid Private REITs
May 20th, 2014

I have written in the past about non-publicly-traded REITs (Real Estate Investment Trusts) and they are probably one of the most legally abused investments that investors fall prey to.

I received a letter from “Ted” who says in 2009 he invested $360,000 of his IRA into four nonpublic REITs with a 7 percent load through a large local financial firm. He says that now two have gone public but are 20 percent below his purchase price. The other two, he says, have a redemption plan at very unattractive prices, and he realizes he is probably stuck. He goes on to say that he learned of my Saturday morning radio show on KFMB AM760 and that my fundamental approach to evaluating, selecting and managing individual stocks is impressive and good common sense. Ted closes with “we should have met in 2009.”

I wish I had some good news for Ted but unfortunately, these nonpublic REITs are not good news. One thing that stood out was that he went to a large local financial firm. I know investors do that because they feel more secure going to the big firms, but big is not always better -- investors still need to understand the investments they are going into. It is one reason why I think investing in stocks is one of the best investments -- all the information is public, and what investors are doing is simply buying a small piece of a large company.

Of the four REITs, there is nothing Ted can do with the two that are still private except hope that they go public and become something good. Here is what I found with both of the public REITs.

Columbia Property Trust Inc. (NYSE: CXP) current price is about $27 per share, close to the 52-week high of $29.59 and a low of $21.76. This REIT has good points and bad. First, the good: It pays a 4.2 percent dividend (REITs are known to pay high dividends). Year-over-year sales rose by 6.5 percent, about a third of the industry average but still positive sales growth. Earnings-per-share growth year over year looks even better at 29.6 percent, double the industry of 15.8 percent.

REITs are known for their leveraged balance sheets and the industry average proves that with a debt to equity of 118 percent. Columbia Property looks pretty good here with a debt to equity of only 60.4 percent. However, this is where the good news stops.

The current PE is very high at 141.6 compared with the industry average of 21.8. That 4.2 percent dividend has a payout ratio of 742 percent of earnings. Return on equity is also terrible at 0.87, well below the industry average of 7.4.

The real scary thing on this REIT is that there is only one analyst who follows it and he is looking only for earnings per share of 56 cents come December 2015. If you do the math, that is a forward PE of 49. That puts this REIT in the high-flying category with Facebook and Netflix without the potential for high growth going forward.

While I know it is possible for this REIT to go up in price in the future, if it came to my portfolio I would sell at current levels.

The second public REIT, Chambers Street Properties (NYSE: CSG), is a little bit different; while both of these REITs invest in office properties, this one also invests in office properties in the United Kingdom and Germany in addition to the United States.

The market cap on this REIT is also about half the size at $1.8 billion.

The bad news here is the current PE is 485 compared with the industry at 21.8. Price to sales is 7 versus the industry at 2.4. It does pay a very high 6.4 percent dividend but has a dividend payout ratio of 10,600 percent; shall we say just a little high? Year-over-year earnings per share fell 90 percent when the industry was up 15.8 percent.

Debt to equity is not too bad at 96 percent when the industry is 118 percent but still on the higher side. Return on equity is also low at 0.1 percent and the REIT has a negative net profit margin of 3.4 percent when the industry carries a positive 11 percent.

Looking at the positives, price to cash flow is 15.8 for Chambers, well below the industry at 48.3. Year-over-year sales did climb 40.25 -- more than double the industry at 18.7 percent. Receivable turnover for the last 12 months also looks very good at 29.5, which is five times the industry at 5.5.

The big positive is the mean of four analysts are looking for earnings per share of $0.69, which tells me the forward PE is pretty good at 11.1. Sum it all up and if you’re willing to be a little risky then maybe this one would be worth holding on to if you watch it closely.

The lesson for today: Don’t ever invest or buy private REITs. There is no reason your money has to be tied up for years just so the broker can get a big commission. Stay with public liquid REITs and companies.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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