From Market Darlings to Market DOGs: U.S. and British REITs

 From Market Darlings to Market Dogs: U.S. and British REITs

It's amazing how an asset class can swing from excessive bullish sentiment to excessive bearishness in just a very short period of time. But that's the case now with many REITs.
Massive selling, fresh multi-year lows, big dividends and insider buying are compelling factors supporting some of the best-managed U.S. and British real estate investment trusts (REITs) this summer. Plus, it doesn't hurt that several of these large REITs also trade at big discounts to their net asset value.
As a value investor, I love buying an asset below its intrinsic worth, or at a discount to net asset value. It's your maximum margin of safety in any market.
That's the case with distressed REITs in the United States and in the United Kingdom, which were home to huge bull market gains from 2000 to 2006.
In fact, both industries rallied to incredible heights since 2000.They both sported excessive valuations and shrinking dividend yields as a result of that rapid appreciation.
My alarm bells went off earlier in 2006, as it became clear to me that gains could not continue at the same rate with market values far exceeding REIT book values. American and British REITs clearly exhibited classic signs of a "bubble." And where there's a bubble, there's trouble - eventually.
But in the span of just eight months, REITs on both sides of the Atlantic have been mauled. Literally, they've gone from market "darlings" to "dogs." Many of these companies now sell below their book-value and are prime beneficiaries of heavy insider buying.
If I loathed most U.S. and U.K. REITs last year, I'm starting to love them now.
ERIC ROSEMAN, Investment Director, The Sovereign Society