REITs: Mid-2010 Report

| About: General Growth (GGP)

REITs have been having a good year while popular averages (i.e. DJI) were slipping and sliding, primarily in Q2. The YTD change for the Dow Jones Industrials and Dow Jones REIT Index are compared:

______________DJI___REIT Index
Dec 31, 2009___10,428_____182
Mar 31, 2010___10,856_____198
Jun 30, 2010____9,774_____188

The Dow dropped 10% in Q2, a very ugly quarter. The REIT index did better, only falling 5%. YTD, the Dow is down 6% while the REIT index went up 3%. REITs have benefited from demand for higher yield securities even though their yields are down sharply from where they have been. In the last 2 years many yields dropped further from reduced dividends. 10 years ago high yield REITs were yielding 10+%, today it's difficult to find a REIT yield at half those levels.

However over the long term, REIT stocks are doing reasonably well. The Dow Jones REIT Index only goes back to 2001, but 9 years ago on Jun 29 the index was 150. By the beginning of 2007, the index rose to its peak in the 350s. Then it dropped to 85 early last year followed by a rebound to 188.

Growing uncertainty in global financial markets has brought back "risk averse." This is detrimental for high yielding sectors like REITs. Today 2 year Treasury notes have an annualized yield of only 61 basis points and the yield on the 10-year Treasury bond is under 3%. Junk bond funds yield around 10%, the Alerian MLP Index yields 7% while REIT yields have fallen to roughly 4-5% (partially from dividend cuts) implying a yield spread of only 1-200 basis points over the 10-year Treasury. This low yield spread is troubling.

REITs are muddling by in 2010. Vacancy rates are high, but they are collecting enough rents to pay bills and turn a profit. Low interest rates help limit the rise in interest expense. Properties values are holding up well, shown by General Growth Properties (NYSE:GGP), the only major REIT that went bankrupt, stock is trading in the mid teens (General Motors stockholders view that with envy). Recently REITs have lost some investor appeal because of lower yields with prospects of minimal dividend increases (if any). Until the risk averse attitude is reversed, REIT stocks will be subject to increased selling pressure (as will other stocks).

Disclosure: None