Sometimes, little catalysts pop into our lives that make us think about ourselves; they prompt us to reflect on how we arrived at this point in our lives. Yesterday, one such “prompt” took me down reflection lane, and here I am just about to tell you about it …
This column is about trading, but I have to tell you I have made more money in real estate than I have made trading the markets, especially after the devastating reversals of the last two years. Even though I have recaptured much of the money that escaped in the stock-market collapse, the fact is that I still have a ways to go to get it all back. It might have been the same for me with my real-estate investments had I not sold all of them back in late 2004 and 2005. Anyone with open eyes could see the collapse coming, and surely, it did. The real-estate market has yet to recover and probably will bounce around on the bottom for some time to come. So why am I telling you this? The prompt I referenced a moment ago is a question I received from one Captain Morgan about trading Real Estate Investment Trusts (REITs).
I am a diversified retired investor with about a 50% mix in high-dividend yield stocks/ETFs. Some of these are REITs. HTS is one of these and has been in a long-term downslide since early October and near-term downslide since early December. It is now on verge of breaking down through its 200-day moving average after announcing increased dividend payouts. Other REITs I own such as NLY are holding up reasonably well by comparison. I can find no negative news on HTS. Your thoughts would be appreciated.
Captain Morgan, REITs are like any other market; they often behave in ways incomprehensible to a reasonable person, or so it seems. HTS is not one such market. I believe a reason exists for the lack of positive movement.
The fundamentals of this billion-dollar REIT are almost too good to be true. Its profit and operating margins (89% and 92% respectively) are phenomenal. Its revenue comes in at about 15%. It has a positive cash flow, and it pays a huge dividend. So why are the shorts going after this REIT? As a percent of float, the shorts take up slightly more than 10%. In fact, the short ratio is 7.4, which is high. The answer is more than likely found in three fundamental categories—Total Cash, Total Debt, and Operating Cash Flow.
The debt of HTS is 6.06 billion. Yes, I said BILLION. I am not sure, but I suspect its burn rate (monthly capital needs to stay in business) is high. And when you look at its Total Cash (173 million) and Operating Cash Flow (160 million), red flags abound, especially in these troubled times for commercial real estate. It just might be that future financing for HTS is doubtful, and that is what the short sellers see. As well, the high dividend is probably just an incentive to keep the stock price up, which is not working.
In this market, one needs to be careful with “high-dividend yield” stocks/ETFs, especially REITs that have large holdings in commercial real estate. I don’t know if this fits you, Captain, but one should be also be careful of investing in high-yield bonds, as another name for high-yield bonds is “junk.” I hope my thoughts don’t drive you to the bottle, Captain Morgan …
Trade in the day; invest in your life …
