REITS Update

News continues to support the belief that the housing "bust" is taking a soft landing. The "bust" the market has been worried about may actually be a correction to an overheated market. Fed Governor Susan Bies said today the country may be seeing a bottom in slumping demand for housing. Moody's has predicted improving home prices in 2/3's of the country's largest residential real estate markets due to the slow-down in construction which has yielding a more favorable market for existing homes. Residential REITS price to earnings multiples are at all time lows and may present an opportunity for a value investment. Toll Brothers (nyse: TOL), the largest luxury home builder, for instance, has a mere P/E of 7.93 versus D.R. Horton's 8.76 P/E, Pulte Homes' 12.25 P/E. At the same time, TOL has that largest operating margins of 18.74% and largest gross margin of 28.11%. Additionally, TOL is a luxury builder, operating in a sector which is not connected to the fast rate of sub-prime mortgage defaults. The downside is its -10.50% YOY revenue growth-although understandable due to the market correction. Looking to the future, with increased globalization, new foreign money will be seeking out a fashionable residence in the US by their new US branches. Asia especially loves the US and there are plenty of newly-made millionaires there ready to buy American property. Furthermore, debt is cheaper than ever. The spread between T-Bills and CCC bonds is only at 2.5%. PE funds and REITS are ready to expand and make acquisitions while the market has undervalued residential REITS. TOL and other residential REITS have the prospect of either external growth, or LBO's over the next year, while they prepare for the next residential bull-market.