| Capitalize
on the Real Estate Market by Investing in REITs |
Published: May 15, 2006
Which high-yield sector is
among this year's top performers?
The answer may surprise you.
Although real estate investment trusts (REITs) are probably the last
group you'd expect to outperform in a rising interest rate environment,
the facts speak for themselves. As of a few weeks ago, the NAREIT ALL
REIT Index was up a robust +12.7% since the start of the year, well
ahead of the broad-based S&P 500's roughly +5% gains.
This recent outperformance
doesn't make a great deal of sense. After all, REITs earn their profits
by buying and selling real estate assets. Rising interest rates make
their financing costs more expensive, and they also drive down property
values by weakening demand. In other words, it's tougher for REITs to
make money when interest rates move higher.
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Some industry analysts have
explained the anomaly by saying that rising rates reflect a strong
economy, which boosts rental revenues on residential and office
properties. Meanwhile, others have suggested that REITs are gaining
ground in anticipation of the end of the Fed's rate-tightening cycle.
However, what's really heating up this sector may be the recent spate of
merger and acquisition activity.
In the past two years, REITs were involved in 29 merger and acquisition
deals totaling $46.4 billion, according to SNL Financial -- a research
firm that tracks public companies. In about half of these deals, private
equity firms scooped up the shares, often at premium prices.
For example, private-equity firm Blackstone Group recently agreed to
acquire office-property owner CarrAmerica (CRE) for $5.6 billion, an
+18% premium to its prevailing share price at the time of the
announcement. Meanwhile, the latest buzz that a Dubai investment firm is
about to make a $1.2 billion grab for a New York City office tower owned
by Boston Properties (BXP) is also fanning the flames of this hot
sector.
Investors could potentially earn solid returns by chasing the next big
takeover target. However, the REIT sector's consistent market-beating
returns are a bigger draw for the long-term investor. Over the course of
the last six years, REITs have delivered total returns (share price
gains plus dividends) of +20% annually, compared with the S&P's +3%
gains over the same period.
What's the prognosis for the year ahead? The recent addition of two
additional REITs to the S&P 500 Index has landed the sector squarely
on the radar screen of institutional buyers and should keep share prices
buoyant. In early April, Boston Properties and Kimco (KIM) joined nine
other trusts on the benchmark index, making these stocks a must-have
purchase for many large mutual funds that track the index. The fact that
REITs now account for more than 2% of the prestigious S&P 500 is
also a sign that this sector has become mainstream.
The newfound popularity comes with a steep price tag. A quick scan of
about a dozen major REITs reveals the group on average is selling at a
lofty P/E of around 28 times last year's earnings. That compares not too
favorably with the S&P's P/E of 18.
If you dig deep, though, you can uncover some hidden gems. To find them,
I recently searched for REITs with the following characteristics:
-- a current P/E of 20 or below, giving the share price room to move
higher
-- a dividend yield of at least 5%, compared to the industry average of
4.5%
-- earnings growth projections next year of at least +5%
The following 10 stocks passed the test . . .
Important
Note: Throughout the remainder of this article, editor
Carla Pasternak provides a table of high-quality real estate investment
trusts (REITs) that meet the aforementioned investment criteria, as well
as an in-depth analysis of several of those individual stocks. However,
in order to view the remainder of this article, you'll need to subscribe
to our premium income-oriented newsletter -- High-Yield Investing. After
you subscribe you'll receive immediate access to this full article, as
well as our monthly High-Yield Investing newsletter and a
host of additional premium content. Please visit one of the following
links to continue . . .
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
