Real estate investment trust (REIT) investors who sulked last month due to weak performance should cheer up now. This is because, contrary to consensus expectations, benchmark treasury yields have coming down -- instead of going to the 3% level, 10-year treasury yields now appear on course to go below the 2% level.
On top of this, we knew that the Fed was very cautious and will likely be even more so given the global growth worries. All of this has been a godsend for the interest rate sensitive REIT industry.
While the interest rate issue has hogged the limelight in recent weeks, one should not forget that the shareholders of this special hybrid class can also gain from the individual market dynamics of different asset types (malls, shopping centers, apartments, offices, hotels, industrial or other facilities) owned and managed by the REITs.
The low interest rate environment, though not perpetual, should lead to more consumption spending. Consequently, majority of these asset types are expected to benefit.
As the worth of an REIT stock depends much on the asset type in which it invests as well as on the local economy, a careful approach needs to be undertaken in selecting the stocks for your portfolio.
In this environment, adding stocks like Washington Prime Group Inc. ( WPG ), General Growth Properties, Inc ( GGP ), First Industrial Realty Trust Inc. ( FR ), Cousins Properties Incorporated ( CUZ ), Health Care REIT, Inc. ( HCN ), Prologis, Inc. ( PLD ), Public Storage ( PSA ), RLJ Lodging Trust ( RLJ ), Avalonbay Communities Inc. ( AVB ), Essex Property Trust Inc. ( ESS ) and American Capital Agency Corp. ( AGNC ) with favorable Zacks Ranks may be a prudent decision.
Statistics Not Too Discouraging
The varying perditions for the timing of interest rate hike resulted in hiccups for the REITs. But the battered September figures could not eat away all the returns that this industry has reaped since January.
As per the National Association of Real Estate Investment Trusts (NAREIT), the FTSE NAREIT All REITs Index dipped 5.6% versus the 1.4% decline in the S&P 500 Index. But in the January to September period, the FTSE NAREIT All REITs Index gained 13.1% against the 8.3% gain for the S&P 500.
And despite global worries, economic indicators like the jobs report and Institute of Supply Management (ISM) numbers recently indicated ongoing improvement albeit at the slow pace.
This economic betterment will lead to improved disposable income, higher occupancy levels and rent, rise in property valuation, and finally improvement in total income and dividend level.
Dividends Remain Key Attraction
Along with the capital appreciation, yield-hungry investors still have a large appetite for these stocks as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends.
As of Aug 29, the dividend yield of the FTSE NAREIT All REITs Index was 3.98%. The yield of the FTSE NAREIT All Equity REITs Index was 3.47% while the FTSE NAREIT Mortgage REITs Index yielded 10.01%. Clearly, the REITs continued to offer solid yields and outpaced the 1.99% dividend yield offered by the S&P 500 as of that date.
REITs have also been much active in the capital market this year and this gives cues of a rise in investor's confidence in this sector and their willingness to pour money into it. As of Aug 29, REITs raised $41.3 billion in initial, debt and equity capital offerings in 2014.
Last year too was notable with listed REITs raising a total of $76.96 billion compared with $73.33 billion in the prior year. The increase was backed by a solid IPO market.
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 of the 250+ industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page.
As a point of reference, the outlook for industries with Zacks Industry Rank #88 and lower (the top one-third of the list) is 'Positive,' between #89 and #176 is 'Neutral,' and #177 and higher (the bottom one-third) is 'Negative.'
The Zacks Industry Rank for REIT Equity Trust - Retail is #44, REIT Equity Trust - Other is #80, REIT Mortgage Trust is #95 and REIT Equity Trust - Residential is #170. Looking at the Zacks Industry Rank for different REIT segments, it is obvious that the outlook for REIT industry as a whole is in the positive-to-neutral zone.
The broader Finance sector, of which the REITs are part, witnessed an uptick of 0.9% in earnings but a decline of 13.5% in revenues in Q2, mainly due to the weak performance by Banks - Major and Insurance. But Real Estate's earnings grew 13.5% while revenues moved 9.3% north.
However, with the Q3 earnings season ramping up, the expectations for this quarter, the rest of the year and the year ahead have gained much focus.
For the third quarter too, expectations for the broader Finance sector remain low. Total earnings are projected to be down -3.9% year over year. But real estate companies stand tall and are projected to experience strong growth in the third quarter (169.7% growth in earnings and 5.8% in revenue).
Nevertheless, things are expected to improve for the overall Finance sector from the fourth quarter with expectations for earnings growth of 9.6% in Q4 2014 and 15.2% for full-year 2015.
For more information about earnings for this sector and others, please read our ' Earnings Trends ' report.