The REITs In The New S&P 11th Sector

|
Includes: DRA, DRN, DRV, FREL, FRI, FTY, IARAX, ICF, IYR, JRS, KBWY, LRET, NRO, PSR, REK, RFI, RIF, RIT, RNP, RQI, RWR, SCHH, SRS, URE, VNQ, WREI, XLRE
by: Easan Katir

Summary

New REIT sector to begin September 1st.

Only eREITs will be included.

Which will funds choose? Slam Dunks and Complete List of Possibilities.

With the unveiling of the new S&P 500 sector this Wednesday, increasing numbers of investors are turning their attention to real estate markets -- specifically REITs. We have created a short list of the major companies which will be in new REIT funds as well as provided a complete GICS spreadsheet of possibilities sent to us by the GICS Committee Chair himself. One can assume these stocks on our list will be prominent in new funds because they are currently listed in the S&P 500. It is important to note that the MSCI has stated that mREITs will not be included in this new sector; only eREITs.

In years past institutional investors have tended to avoid REITs because their financials and resultant P/E ratios look different due to the large depreciation numbers which reduce taxable income. Consequently REITs didn't fit into their normal growth models. With the advent of this new sector managers will need to allocate or explain to trustees why they haven't. Billions will flow into equity REITs. We predict Real Estate sector funds will be a new option in the few choices offered by the 401(k) plans of large companies.

Here is a short list of major REITs which will be included. This is based on information provided by MSCI, S&P 500, Dow Jones, and a number of REIT analysts. Here's a video discussion with David Blitzer, PhD, Managing Director and Chairman of the Index Committee S&P Dow Jones Indices. Yesterday David sent us a full list of Global Industry Classification Standard (GICS) worldwide changes for September. GICS is the taxonomy developed in 1999 by Dow Jones and Standard & Poor's for use by the financial community. This is the first time since then the Committee has created a new major sector. Click here to see the complete spreadsheet. It's a long list of 1,200+ REITs around the world, so search the "Final GICS Code" column for "6010" beginning on row 320 to view more REITs than you ever may have thought existed.

Here is a list of the companies currently in the S&P 500 which meet the qualifications to be transferred to the 11th sector.

S&P 500 REIT

Ticker

Entrance Date

1. AIMCO

AIV

3/13/2003

2. American Tower Corp.

AMT

11/16/2007

3. AvalonBay Communities

AVB

1/9/2007

4. Boston Properties

BXP

3/31/2006

5. Crown Castle International

CCI

3/14/2012

6. Digital Realty Trust

DLR

5/17/2016

7. Equinix, Inc.

EQIX

8. Equity Residential

EQR

11/1/2001

9. Essex Property Trust

ESS

4/1/2014

10. Extra Space Storage

EXR

1/15/2016

11. Federal Realty Investment Trust

FRT

1/29/2016

12. General Growth Properties

GGP

12/9/2013

13. HCP, Inc.

HCP

3/31/2008

14. Host Hotels & Resorts

HST

3/19/2007

15. Iron Mountain

IRM

1/5/2009

16. Kimco Realty Corporation

KIM

4/3/2006

17. Macerich

MAC

5/8/2013

18. Prologis

PLD

7/16/2003

17. Public Storage, Inc.

PSA

8/18/2005

18. Realty Income Corporation

O

4/6/2015

19. Simon Property Group

SPG

6/25/2002

20. SL Green Realty Corp.

SLG

12/23/2008

21. UDR

UDR

3/4/2016

22. Ventas, Inc.

VTR

3/4/2009

23. Vornado Realty Trust

VNO

8/11/2005

24. Welltower, Inc.

HCN

1/30/2009

25. Weyerhaeuser

WY

3/31/1964

Sources: https://www.reit.com/investing/investor-resources/reit-directory/reits-sp-indexes, www.finviz.com

Managers will restructure allocations in the days to come, and of course they've begun already. Writers for the WSJ and ETF.com have reported that "most [passive index funds] intend to transfer shares into "REIT-only" carve-out funds in a tax-efficient fashion, leaving individual holders with the option to maintain the same exposure through two vehicles and/or liquidate the newly created position". This effectively leaves investors with the choice to either maintain their newly diversified portfolio, or to liquidate certain stocks in an effort to consolidate. Companies such as State Street's Financial Select Sector SPDR ETF (NYSEARCA:XLF) are expected to conform to this method, as it has been reported that they will be assigning their real estate assets to XLRE in September. AMT, CCI, EQIX, DLR are just a few of the REITs that XLF currently holds. Other companies such as Vanguard have chosen "engage in trading activity" in order to complete the reassignment of their real estate stocks to other funds.

Actionable item: We don't yet see any "edge" or catalyst for a particular REIT in connection with the creation of the eleventh S&P sector. Perhaps buying the new "carve out" funds, such as XLRE, will catch the wave of reallocation. REIT prices will continue to be sensitive to interest rate expectations, as they have been in recent years, which will be a bigger influence on prices than this new sector news. Any action should only be initiated after due diligence, consultation with personal advisors, as part of a diversified strategy. September 1st marks the official coronation of real estate as a distinct asset class as part of a foundation for modern portfolios worldwide.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XLF, AMT, CCI, WY, DLR, VTR, VNO over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.