Post-Panic REITs: Most Attractive Valuations in Decades

Well-publicized real estate and credit market woes caused investors to stampede out of real estate securities during the financial panic. Despite a strong performance in December, U.S. REITs declined 38% in the fourth quarter of 2008, versus a 22% drop in the S&P 500.

Like global equities generally, real estate securities are now valued at their most attractive levels in decades. At the end of November, the yield on U.S. REIT indexes exceeded the 10% level for the first time since 1991, and the spread to the 10-year Treasury yield reached 7.25%, the highest since 1974.

At the end of December, the yield on U.S. REIT indexes was 8.8% and the spread to the 10-Year Treasury was 6.5%. Investors who have been underweight in this asset class may want to consider adding exposure to U.S. and foreign real estate ETFs.

[click images to enlarge]

U.S. REIT Index Performance Past 10 Years

Foreign Real Estate Index Performance Past 3 Years

Comments

[johnny inca:]

they way to play the reits is through the cumulative preferreds. Some of the smaller less liquid ones are yielding at insane levels. PGE-B is a good example.

Jan 09 07:27 AM

[Paul Price:]

The one caveat in playing the REITs is that almost all of them operate with huge leverage. That was a big plus in normal credit market times but in today's near-frozen lending environment it has become difficult and very expensive to rollover maturing debt issues.

Otherwise healthy REITs are finding it impossible to do 'business as usual' when any substantial debt comes due.

I would only consider REITS that have little to no principal payments approaching in the next 5 years or so.

Jan 09 08:07 AM

[{5U}:]

This article is written by another kid/pundit trying to pick a bottom.

REITs were fueled the 3 biggest sins of the credit bubble era:

-Cheap credit
-Leverage
-Real estate

Pain in commercial real estate typically happens later during a recession. Lower rents and higher occupancies in world where the credit punch bowl is empty and leverage is a taboo will punish the sector.

The bonds may make sense for the stronger players. The stocks are still baking in Goldilocks.

And if the REIT sector does get aid they will end up like the financials. Tighter bond spreads because Uncle Sam is playing Uncle Socialist, but lower stock prices because the growth prospects and business model are impaired in the lower growh, less levered world.

Jan 09 09:18 AM

[Emerald:]

Dear "Equity", your comments are very broad based. Yes, many REIT's have too much leverage and are at great risk, especially retailers, office and hotel REIT's. However, there are a handful of apartment REIT's who have refinanced debt and are in very good financial shape, i.e. AVB and EQR.


On Jan 09 09:18 AM Equity Has No Clue wrote:

> This article is written by another kid/pundit trying to pick a bottom.
>
>
> REITs were fueled the 3 biggest sins of the credit bubble era:<br/>
>
> -Cheap credit
> -Leverage
> -Real estate
>
> Pain in commercial real estate typically happens later during a recession.
> Lower rents and higher occupancies in world where the credit punch
> bowl is empty and leverage is a taboo will punish the sector.
>
> The bonds may make sense for the stronger players. The stocks are
> still baking in Goldilocks.
>
> And if the REIT sector does get aid they will end up like the financials.
> Tighter bond spreads because Uncle Sam is playing Uncle Socialist,
> but lower stock prices because the growth prospects and business
> model are impaired in the lower growh, less levered world.

Jan 09 10:33 AM

[the ilster:]

I completely disagree! We are in the early phases of a bursting credit bubble and most analyst like yourself are not pricing in future bad news. I am Long SRS to capatilaze on the collapse

Jan 09 11:35 AM

[jayminho:]

what you guys think of AHT ??

Jan 09 12:28 PM

[waldipup:]

This article articulates the equity drop and current return on REIT's ,

Delineating how they are cheap and high in yield ,

But there is no analysis pointing to why this cannot deteriorate further in value.

I'd bought a muni bond at par yielding 6.625% , and thought I'd got a bargain when it dropped to 90 and I bought more.

Now it's at 75.

Are commercial REITs going to continue to drop?

Certain sectors may make sense per low debt and good income despite being hammered ,

But a detailed analysis of these specific individual situations would be essential before making an entry decision,

Rather than a general synopsis.

Jan 09 12:45 PM

[sr9web:]

On Jan 09 08:07 AM Paul Price wrote:

"I would only consider REITS that have little to no principal payments
approaching in the next 5 years or so."

---- VERY GOOD advice!

"Bottom pickers" have been KILLED in REITs over the last few months still...

Jan 09 09:37 PM