The U.S. Real Estate Investment Trust (REIT) industry has
carved a niche for itself and is now an important part of the
overall economy. Amid the low interest rate environment following
the financial crisis, the demand for REIT stocks has risen owing
to their ability to deliver steady income. Moreover, they help
investors benefit from their capital appreciation opportunities.
The U.S. REIT industry delivered a solid 2012 overall, with a
relatively strong run in the first half of the year followed by a
modest second half. Furthermore, REIT stocks have outperformed
the broader equity market in 2012 for the 4th straight year.
For full-year 2012, the FTSE NAREIT All REITs Index reported
total return of 20.14% and the FTSE NAREIT All Equity REITs Index
returned 19.70% compared to 16.00% for the S&P 500. The
robust results for 2012 comes after FTSE NAREIT All Equity REITs
Index delivered returns of 8.28% in 2011, 27.95% in 2010 and
27.99% in 2009 compared with the S&P 500's return of 2.11%,
15.06% and 26.46%, respectively.
A Closer Look
A combination of factors has helped the REIT sector stand out and
gain strong foothold over the past 15 to 20 years, the most
notable among them being a healthy dividend payout. As a matter
of fact, investors looking for high dividend yields have
historically favored REIT stocks. Solid dividend payouts are
arguably the biggest enticement for REIT investors as U.S. law
requires REITs to distribute 90% of their annual taxable income
in the form of dividends to shareholders.
The dividend yield of the FTSE NAREIT All REITs Index came in at
4.38% as of Dec 31, 2012 while the dividend yield of the FTSE
NAREIT All Equity REITs Index reached 3.51%. Moreover, the
dividend yield of the FTSE NAREIT Mortgage REITs Index was 12.93%
as of that date compared with the S&P 500 dividend yield of
During 2007 to 2009, REITs took considerably less debt than
private real estate investors, and many were able to sell at the
top of the market when private equity investors were still
buying. Importantly, during the downturn, REITs were able to
acquire properties from highly leveraged investors at heavy
discounts. This enabled them to add premium high-return assets to
Furthermore, REITs managed to raise capital to pay off debt,
owing to a large inflow of funds as institutional investors
allocated more 'dry powder' to the industry, making them an
increasingly attractive investment proposition. In 2011, REITs
raised $51.3 billion in public equity and debt, out of which
$37.5 billion alone was raised though public equity despite a
highly volatile market.
In 2012, REITs have surpassed the prior year figure and raised an
aggregate of $73.3 billion in capital, which included $45.8
billion in secondary equity common and preferred share offerings,
$25.7 billion in unsecured debt offerings and $1.8 billion in
initial public offerings.
Moreover, according to data from NAREIT, debt ratio of equity
REITs (total industry debt as a percentage of its total debt and
equity market capitalization) by the end of third quarter 2012
was 33.8% -- significantly lower than about 51% prior to the
collapse of Lehman Brothers in 2008.
In addition, REITs typically have a large unencumbered pool of
assets, which could provide an additional avenue to raise cash
during a crisis. These assets, in turn, have provided the
requisite wherewithal to the REIT industry to make strategic
acquisitions over time to fuel its inorganic growth engine.
Going forward, we believe M&A opportunities will increase in
the current low interest rate environment. Particularly the REITs
with a solid balance sheet and reasonably better accessibility to
capital are expected to capitalize on such opportunities. In the
latter half of 2012, we noticed an increase in such deals and we
believe the trend will continue in 2013 as well. However,
ambiguity in the market may limit the tempo of the deals.
The Current Scenario
The January data was a little disappointing as the FTSE NAREIT
All REITs Index gained 4.28% compared to 6.24% for the S&P
500. There were minor hiccups in the GDP growth rate of late, but
we noticed that households and business spending has been
accelerating and unemployment rate has been declining.
The European crisis has yet to resolve and given the current
fiscal conditions, the interest rate is expected to remain low
for an extended period. This, ideally, increases the demand for
the REIT stock that offers steady income.
Though the economic uncertainty and particularly the political
situation have been major factors affecting the market, we
believe that with the economic recovery gaining momentum, rents
and occupancies for most types of properties would improve
While a sluggish growth rate in jobs as well as closure of chain
stores is likely to pose a concern for the Retail sector REITs,
limited supply of new ones is expected to help increase the
demand for the existing ones and drive up their rental rates.
In the Apartment sector, though on the whole there have been
improvements, yet minor hiccups remain with an increase in supply
in certain markets. Industrial sector is projected to benefit
from the improving economy while the Timber sector's performance
would gain from an increase in new construction. In a nutshell,
the long-term prospects of the REIT industry look favorable with
a mild cautionary note.
Sector Performance in 2012
In 2012, most of the sectors in the REIT market performed well
and reported double-digit returns. The standout performance in
the industry was that of the Timber REITs (a total return of
37.05% as measured by the FTSE NAREIT Equity REITs Index,
followed by Industrial (31.28%), Infrastructure (29.91%), Retail
sector (26.74%), Health Care (20.35%), Self-Storage (19.94%),
Lodging/Resorts (12.53%) and Diversified REITs (12.20%). The
relatively underperforming sector was Residential (6.94%).
We are bullish on
Simon Property Group Inc.
), the largest publicly traded retail REIT in North America, with
assets in almost all retail distribution channels. Its
international presence gives it a more sustainable long-term
growth story than its domestically focused peers. The geographic
and product diversity of this Zacks Rank #2 (Buy) company also
insulate it from market volatility to a great extent and provide
a steady source of income.
In addition, Simon Property generally enters into long-term
leases with companies, which insulate it from short-term market
swings that have weighed on other players in the industry. With a
favorable supply/demand relationship, rising earnings estimates,
robust growth projections, and a healthy dividend rise (announced
simultaneously with its fourth quarter earnings release), Simon
Property offers an enticing upside potential going forward.
We are also bullish on
Taubman Centers Inc.
), which owns, develops, acquires and operates regional and
super-regional shopping centers throughout the U.S. and Asia.
This Zacks Rank #2 (Buy) REIT focuses on dominant retail malls
that command the highest average sales productivity in the U.S.,
measured in terms of mall tenants' average sales per square foot.
Furthermore, the shopping centers are located in the most
affluent regions of the country, thereby enabling retailers to
target high-end upscale customers and maximize their
profitability. This, in turn, has enabled Taubman to command
relatively premium rents for its portfolio, thereby ensuring
steady top-line growth. In addition, Taubman has one of the
strongest balance sheets in the sector with adequate liquidity.
The company has also taken prudent steps to reduce its operating
Another stock worth mentioning is
), a leading healthcare REIT, primarily engaged in the business
of financing, owning and leasing healthcare related and senior
Being one of the largest healthcare REITs in the U.S., this Zacks
Rank #2 (Buy) REIT boasts a significantly diversified portfolio
and exposure to nearly all types of facilities. Also, the
healthcare sector is relatively immune to the downturn in the
economy, and provides a steady source of income that protects the
company from short-term market volatility.
We expect the company's strategic move in acquiring Atria and
other opportunities to provide significant upside potential to
the stock going forward. Moreover, we remain encouraged with the
recent dividend hike announcement at Ventas.
A significant chunk of REITs are raising capital through property
level debt and equity offerings. Although both debt and equity
financings provide the much-needed cash infusion, they could
potentially burden an already leveraged balance sheet and dilute
earnings. Property level debt is also harder to obtain and more
expensive as commercial real estate prices remain under pressure.
Although overall market fundamentals remain positive for
Apartment REITs, we are a tad bearish on
BRE Properties Inc.
). This Zacks Rank #4 (Sell) REIT is one of the leading owners
and operators of multifamily apartments with a strong portfolio
of assets in supply-constrained premium markets of the Western
The company is currently restructuring its portfolio and
targeting non-core markets for assets dispositions. Moreover, it
expects to fund the current development pipeline with proceeds
from assets sale. Notably, the key strategic motive is to remain
focused primarily on the targeted
high-barrier markets and sub-markets in California and Seattle,
Despite attempts to reposition its portfolio, much of the
company's portfolio still resides in some weak multi-family
markets, which together make up nearly 41% of the company's
Another bearish stock is
), an apartment REIT that owns, operates, acquires, develops and
renovates middle-market apartment communities.
This Zacks Rank #4 (Sell) REIT faces intense competition across
all its markets from real estate investors, including insurance
companies, pension and investment funds, public and private real
estate companies as well as REITs. This affects the top-line
growth of the company and puts considerable pressure on
maintaining its profitability through stringent cost-cutting
Moreover, though the recent employment trends are improving, they
are not yet back to pre-recession levels. The U.S. economy still
continues to shed jobs in some sectors. This, in turn, might
exert pressure on the occupancy rates, affecting the rental
revenue of the company, thereby hampering its long-term
Moving forward, limited supply of new construction coupled with
the growing demand for high-quality properties bode well for the
earnings prospects of REITs, in particular for those that have
assets in high barriers-to-entry markets. To sum up, we firmly
believe that despite a few pitfalls, given the current recovery
of the economy as well as the low interest-rate environment,
REITs still offers a worthy investment proposition for 2013.
(BREUDR): Get Free Report
SIMON PROPERTY (SPG): Free Stock Analysis
TAUBMAN CENTERS (TCO): Free Stock Analysis
VENTAS INC (VTR): Free Stock Analysis Report
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