I completely missed the REIT party this past year as I was still under the pretense that "extend and pretend" was not a national pastime. In fact, a year ago at this time I was busy getting blown up on shorts in the REIT space as these companies diluted their shareholders to the moon to raise capital.
So, my thesis was wrong and commercial REITs have been among the best sectors out there. I laughed about 3 weeks ago as I saw a CNBC interview with one of these top commercial developers who is a guest host on CNBC every so often (can't remember his name). He was asked if things were recovering in commercial real estate and sort of gave a blank stare and said (paraphrase), "well we're living in a world of extend and pretend, so I don't know what the market is." That pretty much sums it up perfectly. (Click to enlarge)
We are in the new paradigm economy, where banks can pretend what they have on their balance sheet is true due to accounting change rules and there is no reason to mark to reality (i.e. take losses) as long as you don't take action against home owners, commercial builders, etc. With the Fed funds rate at zilch for the foreseeable future the banks will keep raking in large profits and only when they can accept the losses does it appear they will take action. So rainbows for everyone it is.
As I've been looking to get my fingers into more sectors for the next "melt up" leg in the stock market, I have been debating whether to keep it simple and just buy the REIT ETF as shown above (IYR) ....but have decided instead to just throw my lot with SL Green Realty (SLG), which is focused on office buildings (especially in New York City). (I would love to find a REIT that only does business around Washington D.C.; talk about recession proof.)
I won't bother to go into fundamentals as every REIT I reviewed as a potential candidate knocked my socks off in terms of valuation. I am simply going off the 1999 model (in stocks) or 2003-2006 (in housing) and realizing that easy money from the Fed will distort any and all markets, so we know this will end badly. Until then... we invest in a parallel universe. Too many paper currency units worldwide are now chasing too few actual assets; it's economics 101 of supply and demand. So we'll repeat what we've just done the past decade, and at some point in the future an uproar will happen as it all comes tumbling down and Bernanke will be "The Fallen Maestro 2.0."
The best thing I can say about SL Green is it has a chart with a nice base, and looks like it just broke out over that base today. Hence, I'll pile in with just under a 2% allocation in the mid $67's. And that's as complicated as you can make it nowadays.
SL Green Realty Corp. is a self-administered and self-managed real estate investment trust, or REIT, that predominantly acquires, owns, repositions and manages Manhattan office properties. The Company is the only publicly held REIT that specializes in this niche. As of March 31, 2010, the Company owned interests in 30 New York City office properties totaling approximately 24,258,700 square feet, making it New York's largest office landlord.
Disclosure: Long SL Green Realty in fund; no personal position
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