Time To Exit REITs – US-FOREX.US
Last week was a big one for real estate investment trusts. Several REITs beat analyst expectations and that sent the sector soaring in a market that was already optimistic. The NAREIT Equity Total Return Index gained 16.5% as investors sighed with relief at an industry which a few months ago looked ripe for bankruptcies. Now REITs look ready to pounce on cheap properties. But analyst Michael Bilerman of Citigroup thinks investors should consider putting a ‘for sale’ sign on their REIT stocks.Few sectors have managed the sharp rebound that REITs have since the financial crisis last winter. REIT shares have nearly doubled since their lows in March, when the S&P 500 hit a 12-year nadir. Since July 10 the sector is up 40%. Why the bullishness? Real estate investment trusts own and manage offices, malls and apartment buildings and take on high levels of debt to compensate for the mediocre returns that real estate typically offers. When the property markets cratered on the heels of the subprime debacle, REITs found themselves mired in expensive mortgages that they couldn’t refinance and holding onto buildings that were plummeting in value.The threat of bankruptcy has receded some as REITs have raised money by selling stock and taking out loans. There are also signs the economy is starting to recover from the shock it experienced with the collapse of Lehman Brothers
last summer. Unemployment is slowing, although still high, home sales are off their winter lows and retail sales may be growing again.But Bilerman sees several reasons to take some profits now. The income that REIT properties are yielding now, called the “cap rate,” is only 7.7%, below the sector’s cost of capital. REIT shares are also trading at a multiple of 15 times their cash flow, which Bilerman considers high in light of the fact that real estate is still in the throes of crisis as companies shed debt. For investors, who often buy REITs for their fat dividends, yields are down to 4.3% which, Bilerman notes, is a half-percent above 10-year Treasury bonds when the historical average is more like 1%.Not all types of property are the same and not all companies are run in the same way. Bilerman sees opportunity as well as danger. As foreclosures skyrocketed last year, many experts predicted self-storage companies would do well, what with millions of Americans needing to move back into rental apartments. Now, however, these firms are just another discretionary expense the strapped consumer can do without, writes Bilerman. Hotels have rallied on the improving economy but could still suffer on lower business travel.Instead, Bilerman likes retail and office properties. He recommends Simon Property Group
, Boston Properties
and Essex Property Trust
, among others. Investors should steer clear of Equity Residential
, ProLogis
and Sovran Self Storage
.