Equity REITs rebounded nicely in the 2nd quarter, when equity REITs posted total returns of 29% (total return FTSE NAREIT Index), vs. a 15% gain for the S&P and an 11% gain for the Dow. So far in July, REITs are down about 8%; the worst performing sectors in July have been Regional Malls (-10.9%), Industrial (-9.8%), office/industrial (-9.6%) and apartments (-9.7%). Overall, REITs are still down 19% YTD in 2009 and 43% over the past year.
OPPORTUNITIES
Many REITs are still trading at discounts to NAV (net asset value), a good buy signal. Historically, over the past seven or so years, REITs have traded near or in excess of NAV.
Even with dividend cuts and share price gains, the average yield for equity REITs is still near 6%. Yields are well in excess (280 bps) of the 10-year Treasury, although the spread has narrowed considerably over the past quarter.
Most companies have been shoring up balance sheets by raising cash through equity and asset sales, with the proceeds being used to pay down debt.
- The credit freeze will have a positive effect on commercial real estate down the road; new office, apartment and retail construction has slowed considerably which will benefit owners in a couple of years. Many companies that we cover have ceased all new construction.
In this environment, we like well-capitalized companies that have adequate liquidity to fund maturing debt at least through 2010. One name we still have a Buy on is
Avalon Bay Communities, Inc. (
), an apartment REIT with low debt and assets in infill markets where little new supply will be coming on board. Fannie Mae (
) and Freddie Mac (
) are still heavy lenders for apartments, which gives buyers and sellers access to capital; as such, transaction volumes in multifamily are not as depressed as other sectors.
In addition, we like Vornado Realty Trust (VNO), another company with low comparative debt, lots of cash and class-A office assets in some good long-term, heavily supply-constrained areas.
WEAKNESSES
REITs still depend on access to capital to fund growth, and with the credit markets still tight, it is difficult to raise money for new developments/acquisitions.
