These are unusual times for the U.S Real Estate Investment Trust
(REIT) industry. After a remarkable run in the first four months of
the year, the REIT industry has nosedived since May, and the
Prior to the recent uptrend in interest rates, the demand for these
high-dividend-paying stocks remained sky high. In 2012, the
industry delivered a solid performance with the stocks beating the
broader equity market for the 4th straight year.
However, with the increasing yields on the U.S. Treasury 10-year
note (2.55% as of Jun 24, 2013, compared with 1.68% at the end of
April), investors are turning their focus away from REITs
(primarily the mortgage REITs, commonly known as mREITs). Moreover,
rising interest rate environment is a growing concern for the REIT
stocks as investors are concerned about the negative impact on the
book values and financing costs.
In May, on a total return basis, the FTSE NAREIT All REITs Index
lost 6.56% and the FTSE NAREIT All Equity REITs Index lost 5.90%
compared with the S&P 500 that gained 2.34%.
The June data looks disappointing as of now, since the FTSE NAREIT
All REITs Index lost 6.62% and the FTSE NAREIT All Equity REITs
Index lost 6.54% (as of Jun 24, 2013) compared with 4.10% loss for
the S&P 500.
Dividends Still Remain an Attraction
With the U.S. law requiring REITs to distribute 90% of their annual
taxable income in the form of dividends to shareholders,
yield-seeking investors continue to prefer these stocks. This has
aided the industry to stand out and gain a strong foothold over the
past 15-20 years.
As of May 31, the dividend yield of the FTSE NAREIT All REITs Index
was 4.19%, and the dividend yield of the FTSE NAREIT All Equity
REITs Index was 3.35%. Moreover, the dividend yield of the
FTSE NAREIT Mortgage REITs Index was 12.55% as of that date
compared with 2.14% for the S&P 500.
Accessibility to capital is a prime factor in the REIT Industry.
After raising $51.3 billion capital in 2011 and a total of $73.3
billion in 2012, REITs raised $40.5 billion in the first five
months of 2013.
During the latest downturn, REITs were able to acquire premium
properties from highly leveraged investors at heavy discounts.
Furthermore, REITs typically have a large unencumbered pool of
assets, which could provide an additional avenue to raise cash
during crisis. These assets, in turn, have provided the requisite
wherewithal to the REIT industry to grow through strategic
acquisitions over time.
Zacks Industry Rank
Within the Zacks Industry classification, REITs are broadly grouped
into the Finance sector (one of 16 Zacks sectors) and further
sub-divided into four industries at the expanded level: REIT Equity
Trust - RETAIL, REIT Equity Trust - Residential, REIT Equity Trust
- Other and REIT Mortgage Trust.
We rank all the 260 plus industries in the 16 Zacks sectors based
on the earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit:
About Zacks Industry Rank
As a point of reference, the outlook for industries with Zacks
Industry Rank #88 and lower is 'Positive,' between #89 and #176 is
'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for REIT Equity Trust - Retail is #82, REIT
Equity Trust - Other is #84, REIT Mortgage Trust is #167, while the
REIT Equity Trust - Residential is #180. Analyzing the Zacks
Industry Rank for different REIT segments, it is obvious that while
the outlook for mortgage trusts and residential equity trusts is
leaning towards the negative side, retail equity trusts and other
equity trusts remain at the low end of the positive side.
The broader Finance sector, of which REITs are a part, remains in
excellent earnings shape. The first quarter 2013 results for the
sector were impressive in terms of both beat ratios (percentage of
companies coming out with positive surprises) and growth.
The earnings "beat ratio" was 73.4% while the revenue "beat ratio"
was 51.9%. Total earnings for this sector were up 7.7%, slightly
moderating from the 10.0% growth in the fourth quarter of 2012.
Total revenues moved north 5.5% in the quarter verses 23.1% growth
in the prior quarter.
Looking at the consensus earnings expectations for the rest of the
year, we remain encouraged since earnings are expected to grow
19.1% in the second quarter, 7.6% in the third quarter and 27.6% in
the fourth quarter, thereby registering full-year 2013 growth of
Being a leader, the U.S. retail industry provides adequate growth
prospects for these REITs. Despite the rise in online shopping
through the Internet, mobile phones and tablets, it is the physical
interaction that the millennial generation stills prefers while
shopping. Hence, amid the technological advancements, in order to
increase their market dominance, the retail industry keeps on
reinventing, redesigning and revamping their physical stores.
With retail properties in premium locations, companies like
Kimco Realty Corporation
The Macerich Company
Acadia Realty Trust
) remain our primary choiceS.
Relatively immune to the macroeconomic problems, these REITs are
expected to benefit from rising national health expenditures that
are projected to grow 3.8% in 2013 and 7.4% in 2014, according to
Centers for Medicare and Medicaid Services. Also, the federal
agency projects average compounded annual growth rate of health
expenditures of 6.2% over 2015 through 2021.
Moreover, though the forthcoming wave of retiring baby boomers is
often cited as a threat to the U.S. economy, this is a boon for the
healthcare sector as senior citizens spend 200% more than the
Hence, we believe that Healthcare REITs like
Health Care REIT, Inc.
Healthcare Realty Trust Inc.
) can capitalize on this trend.
With a larger customer base, rise in e-Commerce application and
supply chain consolidation, the demand for logistics infrastructure
and efficient distribution networks have risen.
This has lead to a rising need for industrial/storage facilities
and the stocks to consider include
Extra Space Storage Inc.
DCT Industrial Trust Inc.
Lodging/Resorts REITs: With the improving U.S. business and strong
international travel and tourism volumes, the lodging sector is
expected to continue with its recovery. Particularly, the North
America market is anticipated to significantly benefit with limited
supply and rising demands.
Stocks that worth a look include are
Sunstone Hotel Investors Inc.
Diamondrock Hospitality Co.
Host Hotels & Resorts Inc.
With the lack of stability in the job market along with mounting
student debt, the home ownership in the under-35 age cohort
continues to decline. Since renting has emerged as the only viable
option for customers who cannot avail mortgage loans or are
unwilling to buy a house at present, we expect the apartment sector
to remain comparatively steady in the coming quarters.
We favor stocks like
Select Income REIT
Apartment Investment & Management Co.
For the sector as a whole, rising interest rates are a looming
concern. High capital costs erode their profit level and hence
trigger a fall in the dividend yield that the investors primarily
look for while investing in REIT stocks. Considering individual
segments, we believe that the current macroeconomic environment
remains a menace for the following sectors.
In the past couple of years, with low short-term rates and
quantitative easing policies (QE), mREITs have benefited from lower
borrowing costs, leading to higher yields (they invest in mortgage
backed securities and use short-term debt for financing their
purchases making money from the spread).
Amid the increasing yields on the U.S. Treasury 10-year note and
apprehensions that the Fed will soon pull out its QE program,
mREITs stocks are continuing to lose their shine. Subsequently, the
FTSE NAREIT Mortgage REITs total returns dropped 17.25% from the
beginning of the second quarter till Jun 20, 2013.
In the recent past, mREITs like
American Capital Agency Corp.
American Capital Mortgage Investment Corp.
) slashed their dividends. The other stocks that we would like to
Hatteras Financial Corp.
Newcastle Investment Corp.
Another division which may underperform is the Office REIT. With
the U.S. economy still registering sluggish growth, the demand for
office properties, particularly in the suburban market still lacks
luster. As such, companies like
Mack-Cali Realty Corp.
) have started to trim their office properties and diversify into
the relatively stable multifamily apartment sector.
The macroeconomic issues and the political situation have been
affecting the market, but we believe that with the economic
recovery gaining momentum, rents and occupancies would improve
further. Moving forward, limited supply of new construction coupled
with the growing demand for premium properties bode well for the
REITs, in particular for those that have assets in high
AMER CAP AGENCY (AGNC): Free Stock Analysis
APARTMENT INVT (AIV): Free Stock Analysis
ACADIA RLTY TR (AKR): Free Stock Analysis
MACK CALI CORP (CLI): Free Stock Analysis
CUBESMART (CUBE): Free Stock Analysis Report
DCT INDUSTRIAL (DCT): Free Stock Analysis
DIAMONDROCK HOS (DRH): Free Stock Analysis
EQUITY RESIDENT (EQR): Free Stock Analysis
EXTRA SPACE STG (EXR): Free Stock Analysis
HEALTH CR REIT (HCN): Free Stock Analysis
HCP INC (HCP): Free Stock Analysis Report
HEALTHCARE RLTY (HR): Free Stock Analysis
HOST HOTEL&RSRT (HST): Free Stock Analysis
HATTERAS FIN CP (HTS): Free Stock Analysis
KIMCO REALTY CO (KIM): Free Stock Analysis
MACERICH CO (MAC): Free Stock Analysis Report
AMER CAP MTGE (MTGE): Free Stock Analysis
NEWCASTLE INV (NCT): Free Stock Analysis Report
SUNSTONE HOTEL (SHO): Free Stock Analysis
SELECT INCOME (SIR): Free Stock Analysis Report
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