I don't want to go back to the 70s either although I had less gray hair then. Seriously, we all know that nothing is guaranteed. In an inflation environment insured bank certificates lose real value. In a deflationary environment the interest rate paid on those CDs is so low that invading the principal may have to occur. Against this background I am crossing my fingers and investing in RNP, purchasing at a small discount and reinvesting the dividends.
In the event of rents not keeping up with inflation you will have real value erosion but by adding back the dividends you are purchasing a 12% buffer to declining overall value. I consider the largesr problem with RNP to be their leverage and hope there are no surprises. In this market I can't find anything I think will serve me better than a portfolio of 50% preferreds and 50% hard asset real estate paying me a 12% dividend. I realize that part of it is a return of capital but not as much as it appears as the underlying portfolio is paying dividends which are a return of capital.
To offset the real estate I am Purchasing AOD which is a large cap global dividend paying portfolio which employs a div capture strategy. I think we are in for an ugly couple of years but believe at some point bottoms will be made and things will turn positive. Good luck.
Thank you for that explanation of real estate depreciation. I think I was mistaken.
"I can not predict where rents and values will go but personally believe that 20 years from now things will cost more, rents will go up and so will values."
That's always the case because of inflation. As long as the growth rate in rents remains higher than inflation, real value will go up. If not, the discount rate for the cash flows will rise by the amount of inflation offsetting or even overtaking the growth rate of nominal rents. Let's hope your scenario is the one we get because I really don't want to relive the 70's!!
I do believe you are incorrect in regard to depreciation of real estate assets. The actual land cannot be depreciated but the structure can be. The rental property I owned but sold allowed depreciation to be taken straight line over 27.5 years. As a result my basis on the property decreased while the market value increased. Expenses such as cleaning, electric problems plumbing could be expensed. Larger items like carpeting or a new roof were capitalized and depreciated. The bottom line was that over many years the rental income increased and the sale price doubled even though my depreciated basis was now vey low and I inurred a capital gain based on the lower basis.
I can not predict where rents and values will go but personally believe that 20 years from now things will cost more, rents will go up and so will values. Dollar cost averaging into REIT cefs offers a great way to purchase cash flowing assets that pay a premium dividend that have a very good chance to appreciate. IMHO--of course I could be wrong.
Thanks for taking the time to write that, Mysonchino.
"Personally, I believe investing in Reit cefs at a discount and reinvesting the dividends is is a great 10 year plan"
How can you argue that buying any portfolio at a discount is a bad trade? I agree with your basic principle.
"companies do and should be expensing maintenance
items and depreciating real property assets."
It has been a long time since I've had to deal with this accounting. However, if I remember correctly, the FASB does not allow depreciation of Real Estate assets. They have to be kept on the books at a guesstimate of fair market value or book value or something, but they are not depreciated. If they're taking a market value (and, generally, this is what's done for revenue producing assets), they are valued on a discounted cash flow basis with rents as the cash flow and some discount rate determined by calculating the company's weighted average cost of capital.
"Generally speaking this is a benefit for cash flow investors as the depreciation is a fiction of the tax code and real property generally increases in value as rents rise and inflation works it's way through the system."
So, I believe that the only items that GAAP allows to depreciate are items that actually...well...depreciate and have to be replaced. In that case, the depreciation is not accounting fiction but a real economic cost. You may not spend the dollar amount you depreciated today on fixing or replacing a depreciable asset, but you will tomorrow. If I have the GAAP rules wrong, please correct me.
I don't differentiate between cash flow investors and other investors. Since dividends are paid out of the company's cash flow and cash flow is owned by the shareholders, a shareholder can simply sell shares to monetize a portion of his investment in the absence of a dividend.
"Finally, the ROC of this fund can be looked at in a light si.miliar to a systematic liquidation of a non dividend paying mutual..."
Exactly. Essentially, it's a reduction of earning assets.
"Simply stated if the ROC amounts to a 4% cash flow amounrt and rents increase by 5% each year then the NAV of the fund should go up 1% each year in theory as the underlying properties are more valuable because they generate more rental income"
This is true if real rents are increasing (real rents = Nominal rent change - change in inflation) but the opposite is true if real rents are decreasing. I.E. - if the rental income increases by more than inflation, you win but if it increases by less, you lose.
You are making this too complicated. ROC is money paid by the fund/company to the shareholder that has not been earned from ordinary operations or taxable events. If you receive 1 dollar but the company only earned .50 then half of the money you receive is just a return of your own capital. You do not pay taxes but the basis is reduced.
With reits and utilities it is a bit more complicated because the underlying securities in the portfolio pay individual dividends that are a ROC because of depresiation and ammortization. Now if we are depreciating airplanes, train cars, busses etc. then this depreciation "passthrough" can be worrisome because these assets truly have to be replaced. However with realestate the companies do and should be expensing maintenance items and depreciating real property assets. Generally speaking this is a benefit for cash flow investors as the depreciation is a fiction of the tax code and real property generally increases in value as rents rise and inflation works it's way through the system.
Finally, the ROC of this fund can be looked at in a light si.miliar to a systematic liquidation of a non dividend paying mutual. Simply stated if the ROC amounts to a 4% cash flow amounrt and rents increase by 5% each year then the NAV of the fund should go up 1% each year in theory as the underlying properties are more valuable because they generate more rental income. As such, the ROC can be maintained and the NAV can actually increase. Of course this does not happen in lockstep but should over time. Personally, I believe investing in Reit cefs at a discount and reinvesting the dividends is is a great 10 year plan
Would a HIGHER Return of Capital be the same as a Dividend cut? I think so.
A higher percentage of ROC is "SNEAKY"...if you don't get the check in the mail you don't get the estimated ROC each month that comes along with the check.
Jeez! You are not making sense. Assume that the fund pays $2.40 for 2008 and part of that is a ROC of $.80.
Total cash received is $2.40
ROC is $.80
Dividend is $1.60
(note that the dividend of $1.60 can be classified as ordinary, long-term capital gain, etc. depending on what was distributed)
See it has to add up. The ROC is only a characterization of the cash you received. It is for income tax reporting purposes. It also reduces your basis in the stock.
Whoops. They must be listening to me.
NEW YORK, March 14 /PRNewswire-FirstCall/ -- Cohen & Steers announced today that it is actively seeking alternative financing for eight of its closed-end funds that have issued auction market preferred securities (AMPS). "We are very sensitive to the liquidity issues facing our funds' preferred shareholders," said Robert Steers, Cohen & Steers co-chairman and co-chief executive officer, "and we are evaluating potential solutions to this industry-wide situation."
Cohen & Steers' senior management is working with all major industry participants-commercial banks and broker/dealers, among others-to evaluate ways to provide liquidity at par value to its AMPS holders. The firm is arranging lines of credit for its funds and is evaluating other alternatives, such as commercial paper and new forms of preferred stock that will replace the existing AMPS. The goal is to redeem the funds' AMPS as soon as possible, although the timing is uncertain.
Steers said further that the firm is working closely with the funds' board of directors to address the situation and find the best long-term solution for the funds-one that balances the interests of common and preferred shareholders. Investors and financial advisors are encouraged to visit Cohen & Steers' Web site (cohenandsteers.com), where it has posted an AMPS report and updates AMPS rates weekly.
Up in AH trading.
No big surprise here. Their recently released annual report disclosed the AMPS risk. You don't get the returns this fund provides without risk. Fortunately the fund has great management who I am sure can manage the problem. As I said before, many others seem to feel the same way as there is no indication of people rushing for the exits.
It is pretty easy to confirm the dividend. You only need to look at the underlying holdings in REIT and preferred stock. If the REITs and preferred stock are not paying or reducing, then the dividen will need to be cut. But I have not seen the REITs held or preferred stock cutting. If you have information, please provide it. Otherwise, quit babbling.
My opinion is my opinion which does not mean I have any info. Just because I am not leading the cheers does not mean I am bannling. By the way I am sure you realiize that the stock is down about 40% since Feb 2007.
Those who really own this fund know that there is a return of capital component to the dividend which reduces your cost basis. They have needed to cut the dividend for a while and now that the capital gains are gone it is a foregone conclusion. Only a matter of a few months. Perhaps the next board meeting.