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Barron's: 5 REITs to Consider Ahead of Solo Sector Debut

Barron's: 5 REITs to Consider Ahead of Solo Sector Debut

By    |   Wednesday, 01 June 2016 08:30 AM

Real estate is ready to shine in the solo spotlight by becoming its own sector in the S&P 500 and MSCI equity indexes later this year.

While REITs have been around since the 1960s, the industry ballooned following the real estate bust in the 1990s as cash-strapped companies turned to public markets when private funding dried up.

The trusts are are being carved out into their own category by S&P Global’s S&P Dow Jones Indices and MSCI Inc. after a surge in valuations. Equity REIT market capitalization more than doubled to $886 billion from 2007 to 2015, according to the National Association of Real Estate Investment Trusts.

“The move signals the increasing importance of real estate as an asset class in global equity markets and is expected to lift and broaden the appeal of one of the main vehicles for investing in it—real estate investment trusts (REITs)— among a wider pool of investors,” Barron’s reports.

“It’s an acknowledgement that REITs are now mainstream,” says Rich Moore, a REIT analyst at RBC Capital Markets, of the addition of a new, 11th sector. More REITs could go public, and more non-real estate companies could seek to monetize their real estate holdings by spinning them out into investment trusts.

Previously lumped into the financial sector, where it was overshadowed by banks, brokers, and insurance companies, real estate typically has been given short shrift and underweighted by stockpickers, Barron's reported.

"Separating real estate from financials will draw attention to REITs’ distinct portfolio dynamics: The trusts are income-oriented and offer higher dividend yields—typically a REIT isn’t subject to income tax as long as it pays out 90% of its income in dividends to shareholders. REITs sport an average dividend yield of 4.3%, making them the fourth highest-yielding sector in the S&P 500. In comparison, the S&P financials index yields 2.3%, and 10-year U.S. Treasuries yield 1.83%. In 2015, nearly 80% of REITs raised their payouts," Barron's reported.

“We expect REIT dividends to grow, on average, 7% a year for the next several years,” says Tom Bohjalian, portfolio manager at Cohen & Steers (CNS) and head of its U.S. real estate security research.

In preparation, Barron’s offers five REIT investment stocks to consider:

Mike Kirby, chairman and director of research at Newport Beach, Calif.-based Green Street Advisors, which has been tracking real estate and REITs for 30 years, offers 4:

  • Equity Residential (EQR), which owns and manages apartments in fast-growing markets with high barriers to entry;
  • General Growth Properties (GGP), a high-end mall operator with the nation’s second-largest portfolio;
  • Federal Realty Investment Trust (FRT), a best-in-class strip-mall operator;
  • Public Storage (PSA), the largest self-storage operator. All will be in the new index.

Gerstein Fisher Chief Investment Officer Gregg Fisher:
  • AvalonBay Communities (AVB), a manager of apartment buildings.

The separate grouping means REITs will lure more generalists, defined as any money manager that doesn’t specialize in the area. The trouble is, such investors have little background in an industry that favors measures such as funds from operations or net asset value, Bloomberg reported.

Generalist funds are underinvested in REITs relative to their benchmarks by roughly $100 billion, in part because some of the concepts underpinning their analysis are unheard of elsewhere on Wall Street, JPMorgan Chase & Co. analysts wrote in a note.
The property companies now make up about 3 percent of the S&P 500 Index. With the new classification, money managers who track benchmark gauges will be adjusting their portfolios to include REIT stocks. Cohen & Steers Inc. estimates $100 billion will flow into the shares.

Simon Property Group Inc. -- the largest REIT, with a market value of about $60 billion -- is “very focused” on soliciting new investors, said Les Morris, a spokesman for the Indianapolis-based mall owner.

“We do feel this is an opportunity for us as these investors are focused on cash flow growth, earnings and dividend growth, and strong balance sheet metrics, which plays to our strengths,” Morris told Bloomberg.

(Newsmax wire services contributed to this report).

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Real estate is ready to shine in the solo spotlight by becoming its own sector in the S&P 500 and MSCI equity indexes later this year.
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Wednesday, 01 June 2016 08:30 AM
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