Why REITs Could Be The Most Dangerous Income Investment
Jun 27 2013, 18:49
(click to enlarge)
Worse still, if you back out dividends (which have been substantial), REITs have underperformed the broad stock market since mid-2010. Why the underperformance? For the past five-plus years, REITs enjoyed the double-edged sword of Fed policy. Low borrowing costs (of essentially zero percent) made it incredibly easy for these leveraged firms to borrow low and lend high.
But since rates can't go lower than zero, there's limited upside for REITs. Investors have kept one foot near the exit in anticipation of an inevitable rate hike when the Fed stopped (or hinted at stopping as we recently witnessed). That's because when rates rise, REITs will take it hard in the shorts.
First, profits will fall. That's because the "spread" between what they can borrow for and what they can lend for will narrow. When you can borrow at 0% and lend at 5%, you can leverage a billion dollar portfolio into hundreds of millions in profits. But what happens if rates jump to just 1%? That shrinks their profitability by one-fifth. If rates rise high enough, current loan repayment levels won't be high enough to secure new borrowing -- and REITs won't be able to secure a nickel of financing from anyone.
Companies like Annaly (NLY), considered to be one of the biggest and best run REITs, could see their current 12.3% dividend drop from double digits to zero -- and the stock will crater even further than it already has. When your business model is based on periodically refinancing long-term debt and pocketing the difference between borrowing costs and lending profits, you can expect huge gains when rates are super-low -- like they are right now.
But every REIT investor should be intimately aware of the other side of the sword. When (not if) rates rise, REITs will have a hard time. We currently own two REITs in our portfolio, but we're keeping a close eye on borrowing rates and, like every other REIT owner, we have one foot near the exit at all times. We'll let you know when things go from bad to worse for REITs.
But here I will help you out.
The Roosevelt management trade Dec 29th.2012, where they bought Archbay Holdings llc 2010B, and than securitized it as a T-1 with USB as Trustee , is fraud. The houses were in foreclosure, titles are junk, Paperwork for them is fraud by Orion Financial Group, not the actual banks who owned them, and I know of one that has liens on them for 4 times the houses worth and 2 are Federal Liens as well . The actual worth of the house at the last appraisal in 2012 was 119.000.00 but their telling you 180,000.00 , the liens are well over 400,000.00 . Now don't you think you should be doing some checking yourselves? This is facts not fiction here and your being brought down that old 2005-2008 road. Remember I warned you.