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Weak Real Estate Values

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The following chart illustrates the close correlation in recent years between real estate investment trusts (REITs) and stocks. For my money, this makes REITs far less attractive today than did the negative or low correlations and the much higher yields of days gone by.

And I also don’t see much value in REITs given that 10-year Treasuries yield about the same—both are near 3% today.

In a separate item, the Securities and Exchange Commission is looking into nontraded REITS as reported in the Wall Street Journal piece “Nontraded REITs Are Put on Notice by SEC.” The article reports, “Money has poured in from individual investors drawn to the steady annual returns of about 7% despite initial fees that often are around 10%.”

The Financial Industry Regulatory Authority (FINRA)—the largest independent regulator for all securities firms doing business in the United States—has issued a complaint against a non-traded REIT offered by David Lerner Associates. Here’s an excerpt from FINRA’s news release dated May 31, 2011:

The Financial Industry Regulatory Authority (FINRA) announced today that it has filed a complaint against David Lerner & Associates, Inc. (DLA), of Syosset, NY, charging the firm with soliciting investors to purchase shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT), without conducting a reasonable investigation to determine whether it was suitable for investors, and with providing misleading information on its website regarding Apple REIT Ten distributions. DLA has sold and continues to sell Apple REIT Ten targeting unsophisticated and elderly customers with unsuitable sales of the illiquid security.

You don’t hear much about their fee structure in this promo piece:

The Wall Street Journal continues, “Some critics of nontraded REITs claim unsophisticated investors don’t understand that firms often don’t generate enough cash flow from the properties, at least initially, to cover annual payments to investors. Borrowing to pay a dividend is a concern,” said Mike Kirby, a principal at Green Street Advisors, which analyzes publicly traded REITs. “You have to wonder how sustainable that business model is.” Yes, you do have to wonder.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.

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