"To the frustration of investors, management remains vague on the initial yield on the $1.1B of activity this year," says BMO Capital, cutting the stock to a Sell with $140 price target. One of the largest REITs with a "pristine" balance sheet, PSA has historically traded at a premium to its peers, but the company's balance sheet and acquisition strategy have begun to look like everyone else's - so why wouldn't its valuation.
"There was a time when people were overly exuberant about how long interest rates were going to stay low. That time is gone," says Cohen & Steers' Jason Yablon. Investors have pulled $728M out of real-estate mutual funds since May 15 (about the time interest rates started rising) vs. $42.8B in inflows into all equity funds, according to Lipper data. After outperforming the broader stock market for several years, REIT stocks have underperformed the S&P 500 for each of the last four months.
The best-performing REITs in Q3, say analysts, were those renting property with short-term leases. Those with longer-term leases - such as owners of health care facilities - suffer most as rates rise.
The only sectors showing gains in Q3 were self-storage (+7.45%) and hotel (+6.23%) REITs. "Self-storage was always regarded as the ugly stepchild of the real-estate industry, but our industry was always thought to be recession-resilient," says Extra Space Storage (EXR) CEO Spencer Kirk.
Total property losses are expected at nearly $2B, with about half housing and the rest from commercial and government sectors.
Franklin Street Properties (FSP -0.2%) is the most exposed, with 14.3% of its current portfolio in the affected area, according to SNL Financial. Next is CoreSite Realty (COR), whose two data center assets in the area account for 13.3% of the company's property count. Next is newly public Independence Realty Trust (IRT +2.2%) - which only owns one property there, but it accounts for 12.5% of its portfolio.
U.S. REITs (IYR and VNQ are a couple of broad ones) posted a 5.41% total return in H1, according to NAREIT, well behind the S&P 500 which gained 13.82%. The top sub-sector was lodging/hotels (HST, HPTRLJ, INN to name a few), up 10.52%, just ahead of Health Care (VTR, HTA, HCP), and Self-storage (CUBE, EXR, PSA).
The dividend payments of Public Storage (PSA), Simon Property (SPG), and HCP make Imperial Capital's "Fit and Healthy" category as payouts exceed the level of Q4 2008. Remaining in the "Recovery Ward" are Boston Properties (BXP), Equity Residential (EQR), Vornado (VNO), and Kimco (KIM) - they've upped dividends but haven't yet recovered to pre-bust levels. "Still Critical" is Prologis (PLD) which has yet to increase its dividend after slashing it in 2009.
Moody's upgrades its outlook for the equity REIT industry to Stable. The sector is "well positioned to handle the fragile economic outlook and the potential for rising interest rates," the ratings agency says, in a new report. Moody's Senior VP notes that REITs have "access to multiple capital sources … at historically low rates that have lengthened their debt maturity profiles," boosted earnings, and increased fixed charge coverage ratios.
Public Storage is engaged in the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use.