Are Rising Interest Rates Harming REITs?


Government bonds have been falling since May, and thus long-term interest rates have continued to creep higher.

Is this a creepy development for leading real estate investment trusts?

REITs need to take on a lot of debt in order to invest in malls, nursing home facilities and large-scale housing units. More debt on the balance sheet normally means more interest expense on the income statement.

A run through the fundamentals and price action of stocks making IBD's seven REIT Leaders (as of Friday's IBD) shows that a rising interest-rate environment hasn't sent institutions screaming for the exits. However, some stocks are trading much further below their 52-week highs than the market itself.

ConsiderOmega Healthcare Investors ( OHI ) andAssociated Estates Realty ( AEC ). Their 2012 long-term debt-to-equity ratios stood at 180% and 178% respectively, the two highest within the group of seven. Omega has definitely cooled off since the U.S. 10-year bond yield started climbing in early May. It's struggling to hold above the 40-week moving average and is more than 20% off its high. Yet Associated Estates is steadily working on the right side of a long base and is just 16% off its high.

Ryman Hospitality ( RHP ) has a 106% LTD-to-equity ratio, yet the stock is trading sardines-in-a-can tight.

Public Storage ( PSA ), whose LTD-to-equity ratio is the lowest in the group at 6%, let its October breakout gains slip away. It's back near the bottom of its prior saucerlike base that began in May.

Omega's interest expense is substantial. In the first nine months of 2013, Omega paid $75.1 million in interest, up 6% vs. a year ago. That interest amount was more than six times the company's general and administrative expense. Total operating costs grew 16% to $115 million. In October alone, Omega made $33 million in new investments, including an assisted-living facility in Florida.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: AEC , OHI , PSA , RHP

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