X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

ORLANDO-Real estate investment trusts are surfacing again as a viable addition to investors’ portfolios as most common stock prices wallow in the basement, but REITs shouldn’t be compared to a money market fund, cautions Gary M. Ralston, president, Commercial Net Lease Realty Inc., Orlando.

“Comparing REITs and money market funds does not make much sense,” Ralston tells GlobeSt.com. “Nothing is as liquid as a money market fund–it is just a bunch of T-bills and commercial paper.”

But he maintains liquidity “is reasonably good in REITs, particularly for individual stock investments up to $1 million-plus.” Ralston argues liquidity is “a portfolio issue, not an individual investment issue.”

He says “not every investment needs maximum liquidity.” Instead, “the portfolio needs adequate liquidity” because “some investments (in the portfolio) may be fairly illiquid.”

However, Ralston says, “With a $150 billion market cap, a diversified pool of REITs provide adequate liquidity for investors.”

George D. Livingston, founder/president, Realvest Partners Inc., Maitland, FL, also cautions that REITs “are not a substitute for MM funds and should not be used as a store of liquid capital.”

Livingston tells GlobeSt.com that an argument in some quarters that REITs are becoming an alternative investment to money market funds doesn’t hold up.

On the plus side, the developer/investor says REITs show higher returns than MM funds; they can be traded; and they have been “getting good press” recently.

On the negative side, Livingston says the base price of the stock can decline, resulting in a loss. “For that reason, they may not always be liquid unless an investor is willing to take a loss,” he says.

REIT transaction costs are higher and “will have tax implications as the managers trade stocks and have management expenses.”

Money market funds are safer, Livingston says. “They have no transaction costs; low management costs; and can be tax free if the investment is in that type of instrument.”

Ralston says REITs “should not be compared to money market funds at all.” Likewise, “money market funds are not the benchmark to use in comparing transaction fees.”

He says “any comparison should be looking at after-fee returns, rather than on the fees.” REITs have the same fee structure as any other investment, the CNLR executive says.

On an argument in some investment quarters that fixed-income investors lose money every time the Federal Reserve cuts interest rates, Ralston sees it differently.

“I would not definitively say that,” he says. “If their income stays the same, their bonds should appreciate in value if the Fed cuts rates.”

On the cash-flow issue, Ralston explains; “REIT stock prices should still move upward (inverse relation) as compared to fixed-income instruments when interest rates fall–an investor would tend to apply a lower discount rate to REIT dividends when interest rates fall.”

The CNLR executive says, “In a falling interest rate environment, REITs may actually raise dividends. Since most REITs are leveraged (albeit modestly), lower interest rates would tend to increase available cash flow.”

But Ralston says that even if dividends are not increased, “the safety of the dividend improves” because “dividends would represent a lower percent of cash flow, providing a larger margin of safety, etc.” He says “this is called a lower payout ratio” obtained by the dividend divided by funds from operations.”

Ralston says, “Since most of the REITs’ revenues come from leases that are longer than one year (with the exception of apartment REITs), the income is rather stable.”

The CNLR executive says “the combination of these factors leads to earnings and revenues for REITs being substantially less volatile and much more predictable than those of other corporations.”

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 3 free articles* across the ALM subscription network every 30 days
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?

GlobeSt. NET LEASE Awards 2020Event

These awards honor the industry's most influential and knowledgeable real estate executives from the net lease sector.

Get More Information
 

GlobeSt

Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.