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La Quinta Properties Inc. (LQI) Message Board

• rwitt785 rwitt785 Feb 27, 1999 9:33 AM Flag

Bought FAX over MT in an IRA

I have an IRA which was 2/3rds in FAX (First
Australia Prime) and 1/3rd in cash. For the 1/3rd in cash,
I was looking for something with a yield of over 8%
and a potential price growth of 12 to 15 % per year.
I was looking at a 3 year time horizon.

With
REITs in a bear market, which might end this year, I
searched this market for reasonably assured opportunities.
I went through Value Line, Morningstar, searched
the internet for business articles on the REIT
market, used Hoover, Zacks and Yahoo for searches and
lastly went to the Yahoo message boards!

What
was my conclusion from this exercise? It was that FAX
had a more assured, less risky future than the REITs
including MT! Yesterday, 2/26, I invested the last 1/3rd of
this IRA in FAX @ 5 7/8 with a yield of (\$.72/\$5
7/8)x100 = 12.255% My arithmetic for FAX based on Value
Line and other sources for the next 3 years is as
follows:

The next 12 months: To 3/2000
Yield = .72 for year
= 12.255%; target price of stock = 1.12 X 5.875 =
\$6.58; Total Return = 24.25%

Year end 2: To
3/2001
Yield = 1.125 x .72 = .81/yr = 12.25%; target price of
stock = 1.12 X 6.58 = \$7.3646; Total return =
24.25%

Year end #3: To 3/2002
Yield = 1.125 x .81 =
.91/yr; target price of stock = 1.12 X 7.364 = \$8.248;
Total return = 24.25%

The further out the
forecast, the higher the risk of error. For year end #3: 3
/2002 a yield of \$.91/yr/shr may be high, the stock
price of \$8 1/4 looks reasonable. Should they have a
dilutive rights offering as this past fall, then all bets
are off, and I would sell all or most at the first
hint of such an event! This projection is near
consistent with value line projections. Anyway this
projection seems more assured then those I could make for
the REITs I looked at including HME!

I am 76
years of age and with mandatory withdrawals from my
IRA, the above forecasts do not include any
reinvestment of dividends. Since this is an IRA, the foreign
tax of .004/shr/mo is not deductable for income tax
purposes. .004 X 1000 x 12 = \$48/1000 shrs. or for 10,000
shares = .004 x 10000 x 12 = \$480 per year.

Whats
your opinion? Did I make the right choice? This basic
message has been posted on Yahoo! under "FAX, MAA & MT"
plus the icefi BB.

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• Exposure? FAX is probably an ADR, but nevertheless exposed to currency fluctuations. The AD can be notoriously fickle when you count on it most. Good luck.

• Probably not smart to put it all in FAX -- but
depends on the extent of other sources of
income.

FAX pluses:

Apparent good performance of
Aussie economy (low inflation, prospects for
growth).
Sells at a discount to NAV.
Probably some good
opportunites in Asian bonds.
-----

FAX
minuses:

Fixed income investments -- you need further interest
rate declines and/or currency appreciation to get
growth in NAV.
Declines in NAV in the past 2 years as
dividends exceeded earnings (minus portfolio
losses).
Leveraged by Preferred Stock (makes for more
volatility).
-----

Debatable item (and biggest risk factor):

Currency
value. (I have seen the commodity argument go awry
before.) On the other hand, I believe that increasing US
trade deficits and net debtor status of US make the US\$
increasingly vulnerable.
-----

Line:

Their coverage of REIT's is very limited -- only 15 or
so of the largest REIT's vs over 250 REIT's out
there.
I have seen many of their 3-5 year projections go
awry -- they don't have the best analysts on the
Street.
-----

Conclusion:

You should probably put some funds into 3 or 4 of the
following REIT's: MT, SKT, TRI, CEI, TCT, JDN. All have
yields of 10% or more and some prospects for growth
(except JDN, which has a 7% yield and better internal
growth prospects), but do carry some business risk --
that's why I would spread it out -- the REIT's are in
different sectors.

• Given your age of 76 and the average life
expectancy of males being 76. Are you sure you want to buy
green banannas? You make no mention of your other
investments or whether your financial situation is of the
nature that you need money at a later date or if you
want to pass your estate along to heirs or a
charity.
A balanced approach is always a good approach and
your entire financial condition should be taken into
consideration before you can get rational answers to your
financial equation.
Very Truly frichard

• Aren't you concerned that the net asset value of
FAX appears to be shrinking with each passing month?
It appears to me that they are selling off assets to
pay out dividends. Right now you get a higher yield
with a chance at share price appreciation with a REIT
such as MT. FAX is also investing in "junk bonds"
outside of the Australian economy, in order to keep the
yield or maybe boost it. This gives them a direction
into the "emerging Asian markets" realm like PREMX or
FNMIX. Risky.

• First Australia Prime - Income (FAX:NYSE)
fund?
Goldman Sachs is forecasting a 20% rise in the Australian
dollar. If that happens, I believe FAX, which is mostly
invested in Australian government bonds, will do quiet
well. It has a 20% discount to NAV and yields
12.3%.
-- Robert Kalb
: Robert, You are certainly not
alone in your belief that First Australia Prime Income
is a very attractive investment -- for a somewhat
aggressive investor. Before I explain why, let me update
your numbers. Goldman is forecasting a 16% rise in the
value of the Australian dollar this year, to 72 cents
from 62 cents at the beginning of the year. Buying
Australian dollars was No. 5 on Goldman's foreign exchange
department's "Top 10 Trades for 1999" list published Dec.
17.
As for FAX's discount, it's currently about13.6%,
and the yield is 11%.
In fact, the fate of the
Australian dollar will probably be the single largest
determinant of how First Australia performs. The fact that
its Australian dollar-denominated assets are
government bonds means Australian interest rates also play a
big role. But not as big as they used to. When the
fund was launched in 1986, the yield on the benchmark
10-year Australian government bond was above 12%. Now
it's around 5.30%.
income at Equitilink, estimates that two-thirds of the
fund's return on its Australian dollar assets are now
currency-related, up from roughly half during the first 10 years of
the fund's life.

So, why bet on a rise in the
Australian dollar? "The Australian dollar has a very high
correlation with commodity prices," says Mariana Bush,
closed-end fund analyst at Evere Securities. In one of the
clearest consequences of the Asian financial crisis,
commodity prices are in the tank. Their leading index, the
Commodity Research Bureau index, made a fresh low
yesterday.
The Australian dollar, currently worth about 64
cents, is pretty well beaten down, too, although it
diverged from the CRB back in September and started
improving. Still, it's now at levels last seen back in
April. And before the Asian financial crisis started in
July 1997, it fluctuated around 75
cents.
Australian Dollar's Strong Points
The Australian dollar
is benefiting or is expected to benefit from four
things.
First is the belief that the worst is over in Asia, and
as a result, commodity prices soon will start to
recover. Calling the Australian dollar "the cheapest
currency in the world" according to Goldman's models, Jim
O'Neill, the firm's chief currency analyst, says that
"with non-Japan Asian growth starting to stabilize,
demand for Australian commodities out of places like
Korea is likely to improve sharply." Goldman figures
the Australian dollar is worth at least 76
cents.
The second basis for a bullish forecast on the
Australian dollar is confidence in the Australian economy.
O'Neill thinks that after the U.S., it's the strongest
economy in the 29-nation Organization for Economic
Cooperation and Development. He's forecasting growth in the
3.5% to 4% range for the next two years. (Inflation
remains as low as in the U.S., though, up 1.6% year on
year, supporting the value of Australian
bonds.)
Third, Blair says the Australian dollar has been
benefiting from the fact that Australia's key short-term
interest rate is now even with the U.S. fed funds rate at
4.75%. Before the Fed's three rate cuts last fall, the
Australian cash rate was lower than the fed funds rate at
5%, which put pressure on the Australian
dollar.
Finally, the Australian currency has benefited from the
rise in the region's most important currency, the
Japanese yen, since the summer, even though the Japanese
economy continues to languish, Blair says.