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May 15, 2008 |
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The National Association of Real Estate Investment Trusts (NAREIT) recently released its May 2008 REIT watch report. The report, which is required reading for anyone watching REITs, confirmed what many investors already knew: after an abysmal 2007 REITs have rebounded strongly in 2008. Keeping in mind that the slowing U.S. economy and volatile financial markets have sparked investor interest in ‘safe’ investment alternatives, one chart from NAREIT helps highlight why REITs have done well in 2008.
“March marked the third straight month of positive inflows into these funds following a 10-month stretch of outflows that ranged between $150 million to $2.8 billion each month.” AP The rebound in REITs represents a missed opportunity. To be sure, our top ‘Turnaround’ prospect leading into the year, U-Store-It, is one of the best performing REITs in 2008 while our other new U.S. REIT prospect, Cedar Springs, is eighth on a list of 149 REITs covered (performance as of April 30, 2008). Apparently when we mention a new REIT, which is not very often, their shares prices soar.
But whether or not a missed opportunity represents a lost opportunity is not entirely clear. Rather, remember that REITs have done well in 2008 because many other areas of the marketplace have done poorly and because U.S. interest rates have remained in check. Given that continued weakness in the markets would likely be a reflection of continued economic malaise, the FFO projections on REITs today could prove overly optimistic (if you back out the ‘mortgage’ related REITs, only 4-companies (or 3.2% of the REIT universe) are expected to post a decline in FFO in 2009 as compared to 2008). When the earnings forecasts start being missed/downgraded will REIT share prices once again suffer? Equally concerning to the slow down scenario is that if long-term U.S. interest rise, as many anticipate they will, the absolutely unattractive yield on most REITs today will also turn relatively unattractive. With gains in FFO already priced in would investors continue to run after REITs if the ‘safer’ return of the U.S. government is more attractive? Probably not. Having watched but not profited from the recent strength in REITs obviously there is the risk that bias is clouding objectivity. Nevertheless, do not chase the REIT rebound! The ‘safety’ facet of the group is likely to prove fleeting as the precarious liaison between growth and interest rates breaks down and/or REIT enthusiasts realize that their holdings are not as recession-proof or inflation friendly as they once believed. Related News Links: Analyst sees 15 pct sell-off for REITs this year AP Self-Storage Business Faces a Test WSJ Wall Street's belief that the self-storage business is recession-resistant is being tested. REIT Funds Are the Hot Properties Now WSJ Investors pouring money into US REIT funds AP REITs' Solid Results May Prove Fleeting WSJ |
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