Analytical discoveries within
investment management firms go something like this: "Hey! REIT
stocks are really kicking butt!" And so it went the other morning as
I shared with my colleague the realization that REIT stocks appear
to be finally turning the corner after a painfully long period of
under performance, dating back to 1997. It’s not as if we hadn’t
noticed the improvement of REITs before now, but in the world of
REIT cyclical peaks and troughs, you have to see a rally go for
awhile, in order to see if it will take. For a couple of reasons,
I’ll stick my neck out and proclaim this rally a recovery and
further solicit your interest in these unique investments.
REIT stands for Real Estate Investment
Trust. They are companies engaged in the real estate business
operating under a unique tax-law-driven charter. Essentially, a REIT
is not taxed on the income as long as it passes most of it through to
shareholders in the form of dividends. What it doesn’t distribute it
reinvests.
REITs are most often distinguished from
one another by their portfolio of property. Types of property include
residential (multi-unit family [apartments]), commercial (strip malls,
office complexes), hospitality (hotels, restaurants), and health care
(hospitals, medical buildings). Factors that effect the income of
REITs include property value, leasing prices, occupancy rates, and
taxes. There are hundreds of REITs that trade on the exchanges.
REITs are attractive for several
reasons including:
- They are a "play" on the real estate
cycle. While not perfectly correlated to the cycle of prices, they
do tend to reflect the dynamics of the industry
- Accordingly, they’re a
diversification from most other stocks. Since they trade on
different fundamentals, they exhibit different price behavior. Need
proof? Check out their lousy return of the last several years.
- They tend to exhibit less volatility
than average stocks, and perform well in down markets.
- They also offer the fixed income
benefit of a bond. Because they must pass income along to
shareholders, they have very high dividend yields. In addition to
the income, they offer additional appreciation in the form of a
rising stock price.
- REITs represent an interest in a
hard asset as opposed to the liquid assets of the securities
markets, and are a form of inflation hedge over time
But REITs attractiveness fluctuates
with investor interest. Like other forms of real estate, the cycles
are looooong. For three years, REITs haven’t done bupkus. In a world
of high flying, gotta-have-a-dot-com stock preference, boring old
REITs were discarded—in spite of great underlying fundamentals.
Starting in December, that seems to have changed.
This year, REITs are up an impressive
20% (according to the Morgan Stanley REIT index). And while their
dividend yields aren’t nearly the 11% of last winter, they’re still a
mouth watering 8%, on average. I believe that part of their
reemergence as a favorite of investors owes itself to the teeth
chattering effects of the NASDAQ in free fall—boring looks pretty good
in a tech blood bath. Additionally, I think the 11% dividend notion
brought some money to the table. Finally, after several years of
consolidation, coupled with earnings growth, some of these stocks look
very strong.
So, where can you get-you-some? At you
friendly neighborhood online stock-screening tool, such as the one at
Quicken.com. Screen by industry for "Real Estate Investment Trusts,"
and do your narrowing from there.
At the time of
publication, the author was neither long nor short any of the stocks
mentioned in this article, either in client accounts or personal
ones. Positions may change at any time.
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