In a previous article, “Bears are After the Homebuilders“, we analyzed the real estate market and in particular the homebuilders. In this article, we will analyze REITs (Real Estate Investment Trusts). A REIT is a company that owns and operates real estate properties generating income. For a company to be considered a REIT by the IRS, it must distribute a minimum of 90% of its taxable income to its shareholders via dividends.
Some REITs are diversified and some specialize in particular segments of the real estate market, residential, office, shopping centers, malls, industrial, health care, hotels, resorts and self-storage, for example. Similar to homebuilders, REIT stocks have experienced phenomenal growth over the last few years partially as result of historically low interest rates. So the question is, “will REITs experience a correction similar to homebuilders?”
The answer is “maybe and depends”. REITs are susceptible to corrections as a result of rising interest rates, but not as much as homebuilders. The reason for the difference is REITs are generally more “recurring revenue” oriented than the “sell them once and we’re done” homebuilders, so even though the value of the properties contained in a REITs portfolio may fall or remain stagnant, the REIT generally continues to receive revenue from the proceeds of its properties.
Furthermore, many REITs specialize in particular segments of real estate, and some segments of real estate are more susceptible to issues related to rising interest rates and macroeconomic conditions than others.
Using PowerOptions stock options search engine SmartSearchXL, we searched for bear call credit spreads stock options for REITs on October 2, 2006 with a probability of success greater than 60%, no earnings report between now and options expiration and with all options expiring on October 20, 2006.
The results are shown below:
|SmartSearchXL bear call credit spreads search October 2|
|HOT||56.93 (-0.26)||HOTJL||06 OCT 60.0 (19)||0.35||HOTJN||06 OCT 70.0 (19)||0.05||3.10|
|HOT||56.93 (-0.26)||HOTJL||06 OCT 60.0 (19)||0.35||HOTJM||06 OCT 65.0 (19)||0.10||5.30|
|AVB||121.28 (+0.88)||AVBJE||06 OCT 125.0 (19)||0.65||AVBJF||06 OCT 130.0 (19)||0.35||6.40|
|BXP||103.68 (+0.34)||BXPJA||06 OCT 105.0 (19)||1.20||BXPJB||06 OCT 110.0 (19)||0.25||23.50|
|MLS||16.88 (+0.17)||MLSJW||06 OCT 17.5 (19)||0.45||MLSJD||06 OCT 20.0 (19)||0.20||11.10|
|MLS||16.88 (+0.17)||MLSJW||06 OCT 17.5 (19)||0.45||MLSJX||06 OCT 22.5 (19)||0.10||7.50|
Four REIT stocks are found through the search, HOT, AVB, BXP and MLS. From its industry designation, HOT is hotel/motel oriented, AVB is residential oriented, BXP focuses on office and MLS is involved in retail. After further investigation, AVB is primarily involved in apartment real estate properties. Apartment real estate generally performs better as interest rates rise, as more potential homebuyers are not able to purchase a home and must rent. Likewise hotel, motels and office real estate usually perform well when the economy is doing well.
Retail usually does well with an improved economy, but MLS has not performed very well in the last several months, and part of the reason has been a result of rising interest rates. We will select a MLS bear call credit spreads position with a return of 7.5%, not bad for a stock options investment of only 19 days. As long as the price of MLS remains below 17.5 at stock options expiration on October 20, 2006, this position will return +7.5%.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a bear call credit spreads investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing bear call credit spreads stock options positions.
[tags]stock options, option income, bear call credit spreads, investment strategy[/tags]