Researching REITs - Made a Decision

Previously I discussed how I was researching some REITs with a goal of buying another REIT to replace the shares of HRPT Properties Trust (HRP) which I sold after it doubled. First I screened for a list of REITs with yields over 9% and I took a look at those and crossed off all but three. Second I looked at those three remaining REITs.

The final 3 REITs were: Northstar Realty (NRF), Mission West Properties (MSW) and UMH Properties (UMH).

I decided to cross off two of them because of some major concerns I had. I didn't want to be in Mission West since they are so specialized in Silicon valley properties. I chose not to buy UMH because their funds from operations where going down every year for the past few years. This is not to say that I think these two REITs are bad investments, but that I liked Northstar a bit more. There are a lot of good things about Mission West and UMH. But I made my choice based on what I thought was the best of the 3...

I ultimately decided to buy Northstar.

They have strong financials and good potential for share rebound. The main risk concern with Northstar is that they have exposure to defaults on the commercial loans they own. But I have good confidence in the economy is on a rebound at this point and if I'm going to invest in REITs at all then I have to believe commercial properties are generally over the worst of it.

I bought 400 shares of Northstar at about $3.52.



I'll again note that I am not a professional financial expert and this should not be taken as financial advice in any way.

Researching REITs - Digging Deeper

Last week I wrote about how I was researching REITs to see if I could find a good value or two. In my first step I did a simple screen for REITs with dividend yields >9% and then crossed off anything with negative earnings. That left me about 9 potential investments. I looked at the basic financials of those and crossed 6 of them off my list for various reasons. That left me with three REITs that I thought warranted a closer look which are:

Northstar Realty (NRF)
Mission West Properties (MSW)
UMH Properties (UMH)

The primary way that I am going to 'dig deeper' into researching these 3 REITs is to read the recent annual reports.

I should take a moment to again note that I'm not a financial advisor nor a professional in the finance industry in any way. My discussion of stocks should not be taken as financial investment advice.

Northstar Realty

One thing to note about Northstar is that right now the basic financial summary is showing a very large earnings level. This seems due to a substantial unrealized gain on investments from 2008 being reflected in the stats. I took a look at their 2008 Annual Report. A few key things I found: Page 5 of the annual report has pie charts showing the distribution of their loans both by sector and location. Their loans are spread across various types of real estate and spread all around the country. Page 11 has a table about the properties they own. 60% of their property value is in healthcare and 25% is in office space. Page 30 shows that barely over 1% of their loan portfolio was non performing. So they are well diversified, they have properties mostly in fairly stable healtcare industry and their loan portfolio isn't showing large defaults. These 3 points are all positive items. On the other hand my primary concern about Northstar is the potential risk in all the loans they carry. Northstar's stock has been over $8 within the past 52 weeks and right now trades under $4, so there is lots of room for the price to rebound.


Mission West Properties

Their 2008 annual report is on their website. They have 111 properties in Silicon Valley with a 66% occupancy rate. The list has the names of their tenants and the rent paid per property. Microsoft and Apple are on the list and those two tenants pay about 25% of the rent that Mission West receives which is a pretty positive point for them. Only 2% of their leases are due to expire in 2009. They refinanced $115M in debt in 2008 at a 6.2% rate for 20 years. Their tenant base and financial situation seems fairly good, but on the negative side they are not well diversified at all and all of their income is dependent on the Silicon Valley area and primarily high technology companies. Mission West stock price is about $6.70 right now and it had a high of $9.88 so its down about a third from its 52 week high.


UMH Properties

Their website is at UMH.com. The 2008 annual report is available on their site. On page 2 of the report they say that they have a portfolio of about $25M in home loans. These loans are made to individuals who have bought mobile homes on their properties. On page 7 of the annual report they list the financial figures for 2004 to 2008. Funds From Operations (FFO) has dropped every year for the past 5 years. In 2004 their FFO was over $11M and in 2008 it had dropped to about $5.5M. Overall UMH seems to be in OK shape, but the general trend of FFO is very concerning. UMH stock price hit its 52 week high of $9.09 earlier in August. Since then it has dropped back down to $7.88 so its not far from its recent peak.

In summary the good and bad points of each REIT are:

Northstar : good - well diversified with good financials and lots of room for stock rebound, bad - risk of loan defaults
Mission West : good - healthy financials and some good tenants, bad - all their eggs in one small basket
UHM : good - generally healthy state and reasonably safe business, bad - poor trend in financial performance in recent years

Tomorrow I'll talk about which of the 3 REITs I decided to buy.

Is the FDIC Going to Run Out of Money?

It shouldn't be a secret that more banks have been failing lately. I've seen some news lately raising concern about the deposit balance of the FDIC and worrying that the FDIC will run out of money. It seems that people think that the FDIC is about to crumble and that all our insured money will be in jeopardy.

Is the FDIC going to run out of money? Right now the FDIC has about $10B in it's reserve. With the number of 'problem' banks right now and the potential losses from their assets if they fail it is possible the FDIC could run out of funds.

But if the FDIC runs out of money that doesn't mean that the FDIC will evaporate or that the guarantee on your bank held savings is going to go away. The FDIC is backed by the United States government. If the FDIC deposits ran low then they could look to the government for aid. It is a given that the government would do what is required to keep the FDIC solvent.

Should you be concerned that the FDIC is running low on funds?

Well let me ask you this, were you concerned in 1991 when the FDIC ran out of money? You may not have even remember or noticed at the time that it happened, but it did.

If you look back at the FDIC data for previous years then you can see that the situation was a lot worse in 1991.

Lets compare the data for 2009 (year to date as of June 30) to 1991:

	2009 YTD	1991
Fund balance	$10.40	($6.9)
Total # banks	6,995	11,921
problem banks	416	1,430
Assets of problem banks	$300	$837
Failed banks	45	268
Assets failed banks	$35.80	$143.40
problem banks as % whole	5.9%	12.0%
failed banks % whole	0.6%	2.2%

As you can see in just about every way, the situation was worse back in 1991 than it is today.

If the FDIC didn't crumble in 1991 then it isn't likely to crumble today either.

It certainly isn't a good thing that there are more banks are failing lately and that the FDIC reserve is dropping, neither are a sign of the imminent doom of the FDIC.

How Much Does Daycare Cost?

Daycare is pretty expensive. How much it costs exactly will vary a LOT depending on where you live and what kind of day care you get. How expensive is it? Lets look at a couple sources:

The NACCRRA did a report on the costs of child care and they say that : "In 2008 average annual price of full time care for an infant in a center ranged from $4,560 in Mississippi to an astonishing $15,895 in Massachusetts."

The Costhelper.com site has the average childcare cost at $611 per month and the high end at $300+/week or over $1200 a month.

So there you have it, prices have a wide range with lows in the $400 / month and highs of over $1,300 / month.

Rates for toddlers are lower and if you get care in someones home then that is also usually lower. If you live in a big city with a higher cost of living then the rates will be higher.

To know what it will cost in your area check out a few daycares on the web and see if they post their rates.