The worst may still be ahead for down-and-out REITs
Investors are wondering when the price will be right for battered REITs.
REITs, or real estate investment trusts, own and invest in commercial property. After trouncing the market for the seven past years, REITs have turned into one of the bloodiest corners of Wall Street amid the recent stock correction.
The iShares Cohen & Steers Realty Majors fund, which tracks the value of the largest REITs, has tanked 39 percent from its high set Feb. 7 and is down 11 percent this year. REITs haven't fared this badly since falling 53 percent in 1937, says Index Funds Advisors.
REITs "are in the bull's-eye," says Jonathan Litt, analyst at Citigroup, pointing out that they're exposed to both the real estate and credit markets. "The correction was needed."
REITs are being hammered by:
- A year-long exodus. Scores of investors who had never invested in REITs before piled in as the stocks soared, says Keven Lindemann, analyst at SNL Financial. REITs were the top-performing domestic investment in 2000, 2002, 2004 and 2006 of all the major asset classes, says Index Funds Advisors.
Panic set in after the Blackstone Group closed on its purchase of REIT Equity Office for a sizable premium of $37 million on Feb. 9, 2007, says S&P's Capital IQ. That, to many professional investors, signaled the top and a good time to get out, Lindemann says.
- The credit crunch. A tight market for loans hurts REITs twice. REITs rely on borrowed money themselves, Lindemann says. REITs may pay higher rates when current loans come due.
But leveraged-buyout firms, which were buying REITs with borrowed money and taking them private, are unable to borrow at favorable rates, Litt says. That takes away a big source of demand for REIT stocks.
- Weakening demand for commercial real estate. Office-vacancy rates are rising in many cities, reducing values of some properties, Lindemann says.
The weakness in REIT stocks has convinced some analysts they're bargains now. The stocks have fallen so much they have dividend yields of 7 percent on average, Lindemann says. That trounces the roughly 2 percent dividend yield on the Standard & Poor's 500 index.
REIT stocks are also trading below the value of their assets, says Joseph Betlej, portfolio manager at Advantus Capital Management. REITs' fat dividend yields and discount prices make high-single-digit annual returns very feasible over the next few years, he says.
Litt says the stocks could still fall 20 percent or more as REIT dividend yields get closer to long-term averages. REITs usually yield 9 percent, he says. A stock's yield is its annual dividend divided by the stock price; for yields to rise, the dividends must rise or prices must fall more.
"There's great buying opportunity ahead," Litt says. "But not now."
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