CHICAGO, Oct. 31, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. REITs, including CubeSmart (NYSE: CUBE-Free Report), Extra Space Storage Inc. (NYSE: EXR-Free Report), Public Storage (NYSE: PSA-Free Report) and Sovran Self Storage Inc. (NYSE: SSS-Free Report).
EIT as an Asset Class
A Real Estate Investment Trust (REIT) is a company that owns and manages income-producing real estate such as apartments, offices, hotels, industrial or other facilities. Such companies also invest in mortgages or mortgage-backed securities attached with properties. REIT shareholders enjoy ownership benefits of the real estate without actually becoming landlords.
This hybrid asset class offers capital appreciation along with yield, thereby adding diversity to ones equity portfolio and assuring competitive long-term returns. It also provides a hedge against inflation.
Industry Performance So Far This Year The U.S REIT industry has been on a roller coaster so far this year. After a remarkable run in the first four months, the sector nosedived in May, as rising interest rates and skepticism about the Fed's Quantitative Easing (QE) program spread caution in the market. The apprehensions spilled over to August.
But around mid-September, the REIT stage was again set for action with the Fed's 'no taper' decision and lower GDP projections for 2013 and 2014, which indicated a continued low interest rate environment in the near term.
As a result, the REIT stocks rallied the most and outperformed the S&P 500. On a total return basis, the broadest U.S. REIT Index -- FTSE/NAREIT All REIT Index -- gained 3.55%, outpacing 3.14% growth for the S&P 500 in September. Further, in October (as of 24th of the month), FTSE/NAREIT All REIT Index return gained pace and came in at 6.13%, compared to 4.31% growth for the S&P 500.
However, over the first nine months of 2013, REITs have underperformed the broad market. Total return of the FTSE NAREIT All REITs Index was up only 2.89% compared to the increase of 19.79% for the S&P 500. Notably, the FTSE NAREIT All Equity REITs Index moved north 3.03% while the FTSE NAREIT Mortgage REITs Index dropped 2.11%.
Though the third-quarter 2013 earnings picture has improved in the most recent week, we notice that the guidance still remains on the weak side, leading to negative estimate revisions at a majority of the companies.
Amid such an environment and along with disappointing government job reports, we hope that the Fed's QE program will continue for a period more than previously anticipated. This should keep the demand for high-dividend-paying REIT stocks alive.
Dividends Are Key Attraction
The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders. Yield-hungry investors thus have a large appetite for such stocks. This has enabled the industry to stand out and gain a footing over the last 15–20 years.
As of Sep 30, 2013, the dividend yield of the FTSE NAREIT All REITs Index was 4.34%. The yield of the FTSE NAREIT All Equity REITs Index was 3.68% while the FTSE NAREIT Mortgage REITs Index delivered a dividend yield of 11.33%. Clearly, the REITs continued to offer solid yields and outpaced the 2.14% dividend yield offered by the S&P 500 as of Sep 30.
Accessibility to capital is a prime factor in the REIT industry. After raising $51.3 billion capital in 2011 and a total of $73.3 billion in 2012, REITs raised $60.6 billion in the first nine months of 2013. A solid IPO market in 2013 primarily made it happen.
In the first three quarters, REITs raised $3.08 billion through 14 IPOs that comfortably surpassed the $1.82 billion capital infusion through 8 IPOs in 2012. The third quarter has been the most active one with around $1.25 billion raised from 4 IPO offerings.
During the latest downturn, REITs were able to acquire premium properties from highly leveraged investors at heavy discounts. Furthermore, REITs typically have a large unencumbered pool of assets, which could provide an additional avenue to raise cash during crisis.
These assets, in turn, have provided the requisite wherewithal to the REIT industry to grow through strategic acquisitions over time. Moreover, the financing for sound properties is currently abundant as willing commercial real estate lenders continue to extend lending.
Zacks Industry Rank Within the Zacks Industry classification, REITs are broadly grouped into the Finance sector (one of 16 Zacks sectors) and further sub-divided into four industries at the expanded level: REIT Equity Trust - RETAIL, REIT Equity Trust - Residential, REIT Equity Trust - Other and REIT Mortgage Trust.
We rank all 259 industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. This ranking is available in the Zacks Industry Rank page.
As a point of reference, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for REIT Equity Trust - Other is #81, REIT Equity Trust - Retail is #104, REIT Mortgage Trust is #105 and REIT Equity Trust - Residential is #177. Analyzing the Zacks Industry Rank for different REIT segments, it is obvious that while the outlook for REIT equity trust – other remain at the low end of the positive range, the rest of the industries – mortgage trusts, residential equity trusts and retail equity trusts are in the neutral zone.
With a larger customer base, rise in e-Commerce application and supply chain consolidation, the demand for logistics infrastructure and efficient distribution networks has grown.
Hence, these REITs that own or manage properties for industrial needs such as bulk warehouses, self-storage facilities, distribution facilities, and light industrial facilities, are enjoying a favorable trend in U.S. industrial absorption. As such, stocks like CubeSmart (NYSE: CUBE-Free Report), Extra Space Storage Inc. (NYSE: EXR-Free Report), Public Storage (NYSE: PSA-Free Report) and Sovran Self Storage Inc. (NYSE: SSS-Free Report) look promising.
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SOURCE Zacks Investment Research, Inc.