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The real estate “wisdom gap” continues to offer a stellar opportunity for investors savvy enough to read below the fold
“Below the fold” is a phrase pretty much guarantied to befuddle young adults who have never enjoyed hanging from a real leather subway strap whilst perusing a genuine physical copy of their morning newspaper.
The trick was to fold the paper in just the right fashion so as to able to hold it in one hand and read it without falling down or losing track of one’s briefcase. Properly done, a person could pick up on breaking stories before arriving at Chambers Street Station in lower Manhattan.
With this habit in mind, publishers placed their most lurid headlines on the top half of the paper, leaving critical details either on the lower half (below the fold), or worse yet, sentenced to the hinterland of Page 6. This habit has continued to this day, only now the juicy stuff is placed on the front “page” of a Web site, and the critical details require six or seven “clicks” of a mouse to uncover.
An example: Above the fold, we read that the National Association of Realtors has “revised” (read: downgraded) its 2007 forecast for existing home sales some 5.33% from 6.38 million to 6.04 million. New home sales have been similarly downgraded. Last year saw sales of 1.1 million. In 2007 we should now only expected to see 852,000. What’s more, 2008 should be worse. We are told that homebuilders can look forward to moving a paltry 848,000 units.
Thus we have the doom and gloom of the unwinding real estate crisis, collapsing banks and blood in the streets holding sway above the fold. However, on “page sixes” across the nation, an entirely different story is playing out. Here, deep in the hidden bowels of the biz pages, we read that professional real estate managers are enjoying quite a renaissance.
Some examples of same: The Indianapolis-based Simon Properties Group’s (SPG: NYSE) historical performance and current valuation is so strong, it’s share price has been upgraded to “outperform” by Credit Suisse. Credit Suisse’ John Stewart was positively effusive, noting that SPG was trading at a 21% discount to the value of its properties.
Specifically, Stewart was intrigued by SPG’s funds from operations figures (FFO). FFO adds such items as amortization and depreciation back into net income. He estimates that SPG executives’ planned $200 million stock repurchase will add some 3 cents per share in 2008. As informative as it may be, this sort of complex trading theorem is far too unwieldy for that sacred acreage above the fold.
So, too, was the news that one of the nation’s largest owners of office and retail property, Vornado Realty Trust (VNO: NYSE), beat second-quarter estimates for its own FFO by nearly 5%. In point of fact, Wall Street had been expecting this critical measurement of a REIT’s health would lose ground. Instead, VNO managed to move its FFO from $1.49 to $1.72 per share.
Rounding out the recent news was a third major player in this arena, ProLogis’ (PLD: NYSE) announcement that its Q2 FFO is up a full 35%, beating estimates by more than 9%. What’s more, Prologis brags that, unlike the homebuilders with their massive multiyear inventory overhang, it foresees nothing but chronic inventory shortfalls and rapid occupancies ahead, leading it to raise its 2007 forecasts for FFO another 7%.
Fortunately for those of you who are witty enough to penetrate past the gory headlines, there is money to be made from this “wisdom gap.” Clearly, these REITs have been unfairly tarred by the name they share with builders like Hovnanian (HOV: NYSE) and Toll Brothers (TOL: NYSE).
This has created a stellar opportunity to pick up shares of either these individual REITs or an ETF bundling the same, such as the Dow Jones U.S. Real Estate Index Fund (IYR: AMEX) -- at a tremendous discount.
As I sit to write, the IYR is trading around $75 per share. We could easily see this ETF put on some $20 by the end of the year. Select deployment of call options could triple that 27% gain.
Adam
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