...So This Makes REITs Great Investments?

Maguire Properties announces defaults, what are the implications?

So, Maguire is giving some properties back to the banks. Is that possibly because they paid too much for them in the first place? For that matter, the loans, did Maguire get them principally because of their size and credit? Did anybody look at the asset as collateral? If they did, did they consider such simple things as debt coverage ratio? Did anybody have the temerity to inquire as to things like price trends or the relationship of capitalization rate to, perhaps, T-bills. Or were these simply, "if we don't shovel the money out the door (either as an REIT or a bank) we will be perceived as missing this big opportunity"?

 

So, now Maguire boldly walks away sending the lender jingle mail. I guess the surprising thing is that it's in the news. How many others are doing the same thing quietly? Is this a trial balloon? After all, the implosion of the commercial property bubble has barely begun. In other words, can a company do this sort of thing in broad daylight and retain any credibility?

 

So far the answer is maybe yes. After all, REITs have been able to sell shares and many are convinced that they're a "bargain" at current price levels. There is often a substantial discount from (bubble inflated) net asset value (NAV) and yield looks attractive.

 

If, however, you get your head out of your portfolio management text for a minute, take a look at REITs versus direct ownership. With an REIT you have limited liability, and excellent liquidity. You have no say in management. This article suggests that the management you're buying may, at least, be pro-cyclical, a point against the idea that REITs diversify a portfolio. At worst they may be self-serving. That point is worthy of an article of its own.

 

So, tell me again why REITs are such good investments today.

This author consults with leading institutions through GLG