Why REITs Can Help You Win—or Lose Less—Right Now

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Sometimes you can win for losing.

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The MSCI US REIT Index has returned about minus 4% so far this year, but real estate investment trusts on average have done better than stocks. The S&P 500 has returned about minus 10% year to date, dividends included.

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One reason for the relative outperformance: REITs are seen as a hedge against inflation, a crucial consideration, given that the consumer price index in March increased by 8.5% year over year on a headline basis. REITs, which are required to pay out at least 90% of their taxable income to shareholders, are popular among income investors.

The outperformance of REITs “is not surprising to us,” says Michael Knott, head of US REIT research at Green Street, a research firm that specializes in real estate. “REITs have shown their resilience [before] in this type of environment, relative to the S&P 500.”

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It isn’t as if real estate companies have hit it out of the park, however. Most REIT sectors are in negative territory this year. Industrial REITs, many of which outperformed earlier in the pandemic, are down about 4.5%; the office sector, which has been hampered by the prevalence of employees working from home since the pandemic started, is off about 3%; and data centers have lost about 12%.

Still, investors can find value names in certain REIT segments, says Gina Szymanski, portfolio manager in the real estate securities group at AEW Capital Management. “The reason why value names have worked is because people are worried about rising interest rates,” she says.

Her observation points to the various crosscurrents for REITs. On one hand, REITs are seen as an inflation hedge because, in theory at least, they can put through rent increases for various properties, from apartments to office towers. On the other hand, rising interest rates can be a concern, partly because they can bring higher borrowing costs for real estate companies.

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The disparities among the various sectors’ returns highlight some divergent issues they face. For example, says Szymanski, regional “malls have been abysmal, but grocery-anchored shopping centers have been great.”

Case in point: Simon Property Group (ticker: SPG), which operates higher-end malls and outlets around the country and yields 5.4%, has returned minus 21% this year. “People are worried about rising gas prices and the impact on discretionary consumer spending,” says Szymanski.

However, Brixmor Property Group (BRX), which has many grocery-anchored properties, has returned about 6% and yields 3.6%.

One of the best-performing REIT sectors in 2022 has been lodging/resorts, up 9%. Hotels, in theory, can reset their prices every night, a hedge against inflation.

As the year began, Knott says, the lodging sector “was beaten up quite a bit from Covid” and “hadn’t fully participated in the rebound.” It was also among the cheaper sectors at that point.

Szymanski says another relatively cheap sector is senior housing. An example is Ventas (VTR), which has returned about 14% this year and yields 3.1%. It returned about 8% in 2021 and minus 10% in 2020.

Other housing REIT sectors haven’t that done well on an absolute basis this year, with apartments down roughly 3%. Still, says Knott, “the demand for all types of housing across the spectrum has been incredibly strong.”

And that bodes well for the strong cash flow growth that is a good antidote for rising rates and inflation, says Szymanski. “The best way to combat rising interest rates is to outgrow that headwind,” she says, pointing to REIT sectors such apartments.

Write to Lawrence C. Strauss at [email protected]

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Credit: www.marketwatch.com /

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