Real Estate Investment Trusts (REITs) are a business structure designed to hold an interest in real estate. REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Under the current tax laws, most REIT dividends are taxed as ordinary income, and not at the lower corporate dividend rate. There are exceptions to this rule, such as to timber REITs, whose dividends are treated as long-term capital gains.
REITs have had a volatile last few years. REITs are considered part of the financial sector, which has been extremely volatile since 2008. Additionally, since 2007, the underlying real estate market suffered well-known issues. Moreover, many REITs hold properties such as malls, office buildings and medical centers, and these industries also may suffer their own fluctuations that will invariably affect their respective REITs.
Below I have listed recent performance rates for ten large-cap REITs in various industries: Annaly Capital Management (NYSE:NLY), AvalonBay Communities (NYSE:AVB), Boston Properties (NYSE:BXP), Equity Residential (NYSE:EQR), General Growth Properties (NYSE:GGP), Public Storage (NYSE:PSA), HCP (NYSE:HCP), Simon Property Group (NYSE:SPG), Ventas (NYSE:VTR) and Vornado Realty Trust (NYSE:VNO). I have provided 2012-to-date, 3-month and 6-month performance rates, as well as their present yields.
Since the financial crisis began, REITs have become more heavily correlated to the broader equity market than they traditionally were. This trend may eventually come to an end. Publicly traded REITs were conventionally considered a convenient method to allocate into real estate that provided both liquidity and often an above average yield. In the last few years, a large number of investors have become reluctant to allocate into real estate, reducing the liquidity and increasing their volatility.
A strong holiday season could bode well for those REITs with greater retail exposure, possibly also including certain warehouse and industrial properties. The flip-side to a strong holiday season could be that improved Internet purchasing may cause additional traditional retail locations to close, increasing retail vacancies. Of course, any further retailer bankruptcies would hurt their landlord-REITs. Most of the retailers and REITs are yet to report Q4 2011 earnings.
These large-cap REITs still offer reasonably high liquidity, each having an average daily trading volume between one million and seventeen million shares, and broad geographic exposure across the nation. These REITs also offer many real and understandable property-related benefits and risks. Exposure to REITs should be limited to a reasonable percentage of a portfolio, based upon factors including age, income, risk-tolerance, objectives and other holdings.
Disclosure: I am long NLY.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice as it does not take into account your specific situation or objectives.