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REITS: Still a Good Buy

By Richard Stavros on May 25, 2016

The Real Estate Investment Trust sector is holding up well against potential headwinds of more Federal Reserve rate hikes, and it continues to be a top safe haven investment as markets become increasingly volatile.

U.S. REITs outperformed the broader equity market through the first four months of 2016, with the benchmark REIT index delivering a 4.09% total return for the first four months of the year.  By comparison, the total return of the S&P 500 in the first four months of the year was 1.74%. 

REITs did pullback a bit in April, likely because the Federal Reserve said it might hike rates as early as June. Two other factors may have played a minor role: red hot property markets acquisitions for REITS pricier, and debt levels at some REITs have become a concern.   

Last year offered plenty of evidence that mere Fed jawboning can still cause dividend stocks to sell off. The REIT sector has suffered various corrections over the last two years, and only one of those involved an actual rate hike. All these various corrections turned out to be good opportunities to pick up some of our favorite stocks for Global Income Edge, which currently recommends five REITs with an average 6.6% yield.

Regardless of what the central bank does in the near term, we continue to believe that rates will stay lower for longer, and that REIT stocks will continue to be attractive amid weak growth in both the U.S. and overseas markets. As we have said often, REITs are less correlated to the broader market and so offer relatively stable income when markets are as volatile as they have been this year. And the sector’s fundamentals are still strong.  

According to a recent US Real Estate Indicators Report by investment bank Lazard, the sector will have 3.5% to 4% average net operating income growth for the year. That dramatically exceeds 2016 core inflation expectations of 1.6% and “should once again easily allow the REIT sector to demonstrate dividend growth well ahead of inflation.”

In contrast to slumping year-over-year first-quarter corporate earnings, the Lazard finds that property fundamentals and REIT earnings remain solid, “which does help the REIT sector ‘grow into’ slightly elevated earnings valuations.”

While this should not suggest that REITs have room to run, the relative comparison to broader equities shows that due to the still-solid earnings, REIT valuations are based on a more stable earnings denominator (5% to 7% estimated P/FFO growth in 2016), the bank found.

Furthermore, while the sector’s discount to underlying net asset value disappeared with the March run-up, REITS are still trading in line to underlying net asset value (NAV), which is slightly below the sector’s long-term 3% average premium, according to the investment bank’s reports. The bank notes that the snap back to NAV closes out the REIT sector’s longest time trading below NAV since the global financial crisis.  

In the subscriber section, we take a look at the performance of one of our most favored REITS.

P.S. I am the chief investment strategist for Investing Daily’s Global Income Edge, and analyst for Utility Forecaster. For Global Income Edge we take a worldwide view of income stocks that combine the stability of developed countries with the growth of developing countries. Our goal is to recommend high-yielding, relatively safe stocks (including REITs) that provide superior yields to U.S. stocks alone. Feel free to use the Stock Talk feature beneath this article if you have any questions about it. Thank you.  




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