Sunday, August 9, 2015

REIT stocks

Real Estate Investment Trusts (REITs) are companies that own, and in most cases, operate income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. Some REITs also engage in financing real estate. Created by the U.S. Congress in 1960.  REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.


Symbol  Company     Sector   Dividend ($)   Yield (%)   Market Cap
  • SPG       Simon Properties            Shopping centers   1.40  2.97    58.85B
  • HCP        HCP Inc.                       Healthcare             0.56         5.32      19.65B
  • NLY       Annaly Capital Management                       0.30     11.93  9.49B
  • KRC      Kilroy Realty Corp.        Office                    0.35         1.89  6.47B
  • TCO      Taubman Centers            Shopping centers   0.56       3.07    4.55B
  • MAC    Macerich                                                         0.65      3.12   13.02B
  • CHSP     Chesapeake Lodging Trust       Hotels        0.35       4.24   1.95B
  • AHH      Armada Hoffler Properties  / Apartments   0.17     6.47  417.31M
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The chart below tracks the price performance of the NAREIT All Equity REIT Index going back to the early 1980s (in blue). It compares the index to the Federal Reserve’s targeted Fed funds rate (in orange). Periods of extended tightening are highlighted in the blue columns.

We’ve had five periods of extended tightening since 1981. In three of them, REIT prices did indeed suffer. But in the other two – or a full 40% of the total – REIT prices did very well. In fact, the last tightening cycle in the mid-2000s coincided with one of the greatest bull markets for REITs in history.

As for today, most of the hurt in the REIT sector that comes with a rate hike has already been priced in. That’s because this is the most telegraphed Fed tightening in history. Yellen has been preparing us for this day for months. Investors who wanted to sell, for the most part already have.

So as a result, income-focused investments like REITs have had a terrible year. After topping out at $89.27 per share in late January, the Vanguard REIT ETF (NYSEARCA: VNQ) fell to as low as $74.67 by late June. That’s a decline of 16%, based almost exclusively on Fed fears.

But since then, REITs have been making a comeback, up about 6%. For the reasons we’ve explained, we expect that modest momentum to continue, with or without a Fed hike. 

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