REITs Seen as Safer Haven in Downturn
Real estate investment trust shares suffered along with the rest of the stock market last week, but REITs suffered less, and many analysts expect them to continue outperforming the broader market, as they have for most of this year.
An exception was hotel REITs, which dropped sharply last week and could slide even more, analysts believe, as business travel and tourism fall off as a result of the terrorist attacks on New York and the Pentagon.
The Bloomberg REIT stock index fell 7.6% last week, compared with a 14.3% plunge in the Dow Jones industrial average.
The REIT index rose 0.9% Monday amid the broad market’s rebound. Southland-based based REITs Arden Realty Inc. and Kilroy Realty Corp. were down 2.9% and 8.9%, respectively, last week. Arden eased slightly Monday but Kilroy rose 1.1%.
A number of analysts said their outlook for the REIT sector remained unchanged after the attacks, except for warnings about hotel REITs and the prospect that a continued economic slump will hurt all industries to some degree.
REITs own property and pay out to shareholders virtually all of the rent collected on their buildings. That makes the stocks attractive for investors who like steady dividend income.
While many other stocks were performing poorly this year even before the attacks, REITs had been a strong sector.
Investors had already been turning to REITs and “other stocks that offer some sense of stability and income,” said analyst Ann Melnick of brokerage A.G. Edwards & Sons in St. Louis. Now, she said, investors are even more likely to seek stable, income-producing stocks rather than the sizzling growth issues that ruled the market in the late 1990s.
“There is still the potential for these stocks to return about 12% to 15% per year for the next couple of years, with half of that coming in dividends,” said analyst Jay Leupp of brokerage Robertson Stephens in San Francisco. “We think that is an attractive prospect in this type of a market.”
Counting price appreciation and dividend income, the average REIT stock’s return had been about 10% year to date before Sept. 11, said analyst Mike Kirby of Green Street Advisors in Newport Beach.
“What has attracted investors more than anything is that earnings growth is still a positive number,” Kirby said, “and the dividends are quite high and well-supported.”
The economy’s slide will hurt REITs to some degree, Kirby said. REITs that own shopping malls and office buildings could lose tenants or tenants might cut back on rental space, Kirby said. Apartment REITs could suffer if renters begin doubling up to save money.
“But the good news is that you can throw in some pretty draconian assumptions and the REITs will still post earnings growth next year,” Kirby said. “The growth rate may slow, but it’s going to be a positive number.”
General Growth Properties, a Chicago shopping center REIT, announced a 23% increase in its quarterly dividend Friday, to 65 cents a share. Another Chicago REIT, Equity Office Properties, declared a third-quarter cash dividend of 50 cents a share in July, up 5 cents.
The outlook for most types of REITs is relatively good, Leupp said. He noted that vacancy rates in office buildings, malls and industrial buildings owned by REITs are about half of what they were when the nation lapsed into recession 10 years ago, while relatively little new space is being built.
This means that the real estate industry will suffer far less than it did in the early 1990s, even if demand for space stays flat or declines slightly, Leupp said.
“REITs will be a very predictable and therefore attractive investment in this environment,” Leupp said. “‘Except for hotel REITs. Anything that has a lodging component has exposure now.”
Many analysts consider apartments and industrial REITs the safest bets in an economic downturn. But shopping center REITs, such as Santa Monica-based Macerich, also have done well this year because consumer spending has remained surprisingly high, analysts said, although it is unclear whether it will hold up if the economy sags further.
Kirby thinks REITs with holdings in Southern California should weather the economic downturn relatively well, but those with properties in hub airport cities including Denver, Dallas and Chicago could suffer as a result of airline layoffs.
