Morningstar Advisor - February/March 2009 - 56

Sector Rap How to Spot a Trustworthy REIT By Haywood Kelly Real estate investment trusts have slid off a cliff, but while some firms deserve to fall hard, others are on better footing. Real estate sits at the epicenter of the global financial crisis. Although housing was the first area to implode, we’re now well into a severe downturn in other types of real estate—a downturn that has crushed equity real estate investment trust stocks the past year. In 2008, the REIT industry shed 62% of its value, according to the Dow Jones Equity REIT Index. I recently spoke with Morningstar senior stock analyst Joel Bloomer, who heads up Morningstar’s REIT team. The team covers more than 70 REITs, which gives Morningstar one of the broadest coverage lists out there. Haywood Kelly: Joel, walk us through health-care-related facilities. Apartments will see head winds as cash-strapped consumers trade down to more-affordable accommodations and in some cases consolidate with friends or family to save cash. The oversupply of residential properties being converted into apartments won’t help matters, either. We expect demand for public storage to suffer as consumers realize that storing goods used infrequently (if at all) is not worth the monthly expense. Demand for industrial space is obviously tied to general economic activity, which is declining rapidly around the globe. Retail properties should suffer from the growing number of retail bankruptcies. In addition, as retailers reduce store expansion plans or, in more extreme cases, shutter stores, the supply of retail properties will expand sharply. Lastly, hotel demand is inherently the most discretionary, and consumers and businesses are rapidly reducing expenses to the bare necessities. Plus, the oversupply picture in the hotel space appears to be worse than all other property types—a recipe for trouble, in our opinion. HK: Despite that negative outlook, REIT stocks JB: I think investors should second-guess their initial reactions regarding REITs. This sentiment might be surprising given how awful REIT stock performance has been, but the fact is that much of the punishment was justified. Earlier this year, it became clear to us that there was a major disconnect developing between the perceived strength of REITs relative to their tenants. Basically, the question became, How can property owners remain unscathed when consumers, manufacturers, retailers, and various other tenants are very clearly suffering from a rapidly deteriorating global economy? Well, the answer is that they can’t. As a result, REIT stock prices are starting to reflect more realistic outlooks that include falling rents, property value depreciation, and ultimately reduced cash flow. Still, not all REITs are cheap, especially when our concerns about the amount of leverage in this space are taken into account. HK: Are there REITs on your coverage list that might not make it to the other side of this recession? JB: Almost definitely. As was common a likely scenario for 2009 across some key property types. Joel Bloomer: While some firms will be hit harder than others, overall we expect cash flow to decline in all property types. Here’s roughly how we would rank the relative performance from bad to worst: health care, apartments, public storage, industrial, retail, and hotels. Health care should remain relatively insulated from turmoil, with the one caveat that some health-care REITs have concentrated tenants with weak balance sheets. Still, it’s hard to imagine mass reductions in the number of hospitals, skilled nursing facilities, and other are now yielding 8% to 9%, up from 3% to 4% a year ago. The knee-jerk reaction might be to think the group is a bargain. What do you say? in several industries over the past few years, REITs became drunk on capital. Exceptionally lenient debt markets acted as a bottomless wallet that some REIT management teams 56 Morningstar Advisor February/March 2009

Morningstar Advisor - February/March 2009

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2009

Morningstar Advisor - February/March 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Inbox
How Do You Gauge and Measure Risk?
No Skinny-Dippers Here
Heading to Shore
Investment Briefs
Weapons of Mass Destruction?
Déjà Vu All Over Again
A Failure to Gauge Risk
Five Areas to Find Opportunities
Getting a Read on Risk
Heavenly Returns
Greenspring Comes to the Rescue
How to Spot a Trustworthy REIT
Four Picks for the President
Find Succor in These Large Dividends
These Stocks Are Fiscally Fit
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
You Gotta Look Sharpe
Morningstar Advisor - February/March 2009 - Intro
Morningstar Advisor - February/March 2009 - Morningstar Advisor - February/March 2009
Morningstar Advisor - February/March 2009 - Cover2
Morningstar Advisor - February/March 2009 - 1
Morningstar Advisor - February/March 2009 - 2
Morningstar Advisor - February/March 2009 - Contents
Morningstar Advisor - February/March 2009 - 4
Morningstar Advisor - February/March 2009 - 5
Morningstar Advisor - February/March 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - February/March 2009 - 7
Morningstar Advisor - February/March 2009 - 8
Morningstar Advisor - February/March 2009 - Letter from the Editor
Morningstar Advisor - February/March 2009 - Contributors
Morningstar Advisor - February/March 2009 - Inbox
Morningstar Advisor - February/March 2009 - How Do You Gauge and Measure Risk?
Morningstar Advisor - February/March 2009 - 13
Morningstar Advisor - February/March 2009 - No Skinny-Dippers Here
Morningstar Advisor - February/March 2009 - 15
Morningstar Advisor - February/March 2009 - 16
Morningstar Advisor - February/March 2009 - Heading to Shore
Morningstar Advisor - February/March 2009 - 18
Morningstar Advisor - February/March 2009 - 19
Morningstar Advisor - February/March 2009 - Investment Briefs
Morningstar Advisor - February/March 2009 - 21
Morningstar Advisor - February/March 2009 - Weapons of Mass Destruction?
Morningstar Advisor - February/March 2009 - 23
Morningstar Advisor - February/March 2009 - 24
Morningstar Advisor - February/March 2009 - 25
Morningstar Advisor - February/March 2009 - 26
Morningstar Advisor - February/March 2009 - 27
Morningstar Advisor - February/March 2009 - Déjà Vu All Over Again
Morningstar Advisor - February/March 2009 - 29
Morningstar Advisor - February/March 2009 - 30
Morningstar Advisor - February/March 2009 - 31
Morningstar Advisor - February/March 2009 - 32
Morningstar Advisor - February/March 2009 - 33
Morningstar Advisor - February/March 2009 - A Failure to Gauge Risk
Morningstar Advisor - February/March 2009 - 35
Morningstar Advisor - February/March 2009 - 36
Morningstar Advisor - February/March 2009 - 37
Morningstar Advisor - February/March 2009 - Five Areas to Find Opportunities
Morningstar Advisor - February/March 2009 - 39
Morningstar Advisor - February/March 2009 - Getting a Read on Risk
Morningstar Advisor - February/March 2009 - 41
Morningstar Advisor - February/March 2009 - 42
Morningstar Advisor - February/March 2009 - 43
Morningstar Advisor - February/March 2009 - 44
Morningstar Advisor - February/March 2009 - 45
Morningstar Advisor - February/March 2009 - 46
Morningstar Advisor - February/March 2009 - 47
Morningstar Advisor - February/March 2009 - Heavenly Returns
Morningstar Advisor - February/March 2009 - 49
Morningstar Advisor - February/March 2009 - 50
Morningstar Advisor - February/March 2009 - 51
Morningstar Advisor - February/March 2009 - Greenspring Comes to the Rescue
Morningstar Advisor - February/March 2009 - 53
Morningstar Advisor - February/March 2009 - 54
Morningstar Advisor - February/March 2009 - 55
Morningstar Advisor - February/March 2009 - How to Spot a Trustworthy REIT
Morningstar Advisor - February/March 2009 - 57
Morningstar Advisor - February/March 2009 - Four Picks for the President
Morningstar Advisor - February/March 2009 - 59
Morningstar Advisor - February/March 2009 - Find Succor in These Large Dividends
Morningstar Advisor - February/March 2009 - 61
Morningstar Advisor - February/March 2009 - These Stocks Are Fiscally Fit
Morningstar Advisor - February/March 2009 - 63
Morningstar Advisor - February/March 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - February/March 2009 - 65
Morningstar Advisor - February/March 2009 - 66
Morningstar Advisor - February/March 2009 - 67
Morningstar Advisor - February/March 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - February/March 2009 - 69
Morningstar Advisor - February/March 2009 - 70
Morningstar Advisor - February/March 2009 - 71
Morningstar Advisor - February/March 2009 - Undervalued Stocks
Morningstar Advisor - February/March 2009 - 73
Morningstar Advisor - February/March 2009 - 74
Morningstar Advisor - February/March 2009 - 75
Morningstar Advisor - February/March 2009 - Most Popular Variable Annuities
Morningstar Advisor - February/March 2009 - 77
Morningstar Advisor - February/March 2009 - 78
Morningstar Advisor - February/March 2009 - New at Morningstar
Morningstar Advisor - February/March 2009 - You Gotta Look Sharpe
Morningstar Advisor - February/March 2009 - Cover3
Morningstar Advisor - February/March 2009 - Cover4
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