Stephen Lai: Do u have any recommendation for REIT? Wonder if REIT will enjoy property appreciation. I wanna invest some of my time try to understand how it work

Stephen Lai: Thanks man, that’s more than enough for me to start
Michael T. Nowacki: I’ve never been a fan of REITs (except NLY). They are usually loaded with debt and also earn low returns on equity. It is very hard to determine the “real value” of property, so book value can be overstated or understated by a lot. The dividends would have to be higher than what I can get in preferreds for me to invest for income. I like investing in undervalued businesses that grow much better than investing in properties.

Michael T. Nowacki: If I were to invest in real estate I would buy a bank REO, estate owned (the children just want to sell house quick), or other home that I determined to be undervalued. For me personally, I would have to get pretty high returns for it to be worth being a landlord. If I can get 8% in preferreds by sitting on my butt, I’d have to get much more than that to be a landlord and cover risk of vacancies.

Michael T. Nowacki: Matt, my point was if I want income I can get higher yields elsewhere. HCII yields 6.5% and is growing fast and increasing the dividend every year. O has $1.7 billion in LT debt. They only earn $130 million. That is a huge debt to earnings ratio. They have interest expense of $110 million a year. Regarding appreciation, even if you bought them in 2009 and they skyrocketed, consider opportunity cost. Many companies you would have invested in during 2009 would have skyrocketed too. I am not against investing in REITs, I would just have to find a very great opportunity for it to attract me.

Michael T. Nowacki: I use it that way because lets say you own the business and want to reduce debt with earnings, you have to do it after taxes and interest expense right? It would take a decade to get debt free unless they sold off assets (reducing earnings though). I’ve followed HCII for years. Young company with very good management. Just doubled policy count.

Michael T. Nowacki: interest expense and taxes are not considered operating expenses

Michael T. Nowacki: Yes, but you lose the income from renting. If you sell half of your property, you lose half your rental income

Michael T. Nowacki: I am not saying they will need to pay down debt, I am saying they are highly leveraged and still earning very low ROE and ROA. My point is I’d rather invest in ALLY preferred shares and earn 9.5% than a REIT yeilding 4.5% if my goal is income. And if I want capital appreciation and dividend, I like HCII (Ally-B will likely appreciate too). I personally would only invest in a REIT if the yield was high or I knew it was significantly undervalued.

Michael T. Nowacki: With common stocks too: http://seekingalpha.com/…/312828-7-stocks-that-will…
7 Stocks That Will Outperform In 2012 – Seeking Alpha
seekingalpha.com

Stephen Lai: Good stuff, if I ever buy into REIT, trying to buy undervalued one is my top priority. It sure will take a lot of work to discover the right one. Oh, one more thing. I’m a landlord myself, and I don’t enjoy it. 🙂

Michael T. Nowacki: Matt did you buy HCII? Hope you did. It is up 30% since April 4th