REITs Continue Their Run

REITs continued their run in May, increasing about 3%. Quarter-to-date, REITs are up over 33%, mostly due to an April rally. REITs are still down about 8% for the year.

REITs have recovered due to several factors: 1) The credit markets are continuing to improve and banks are starting to lend again, due in part to the governments money that is flowing to banks 2) Many REITs continue to issue new equity, which has been well received by investors 3) REITs are focusing on their balance sheets,  paying down debt, reducing costs and development , which reduces risk and makes for leaner companies 4) Investors seem to be more optimistic about the state of the economy going forward, and 5) In March, REITs fell to possibly once-in-a-lifetime prices which spurred buying.

Equity REITs are now trading closer to the value of their assets. Although, as a group, REITs are still trading below net asset value. Although, underlying fundamentals cannot be ignored. 1Q results among companies we cover were generally unspectacular and operations are deteriorating in all major property types: apartments, office, retail, and lodging.

Most property indexes still show large y/y declines in property values and commercial loan delinquencies are increasing every quarter. As property values fall, so does the value of property REITs, although the selloff last that began last year was an overreaction and values were brought down to unrealistic levels.

We think the REIT rally has more room to run - not much, though. Fundamentals cannot be ignored, and we expect more companies than not to lower estimates over the next couple of quarters. Two larger-cap names we still like are Avalon Bay (AVB) and Boston Properties (BXP). The yields of both companies are below average but appear safe, and both have low relative leverage.

Subscribe by RSS Subscribe by Email