Can the sluggish economy really justify the prices investors are currently paying for stocks? That’s the question on traders’ minds these days, and it certainly applies to real estate companies, which have seen their shares roughly double since the market’s financial crisis nadir in March, easily trumping the S&P 500’s mere 57% gain. There are fewer bargains in real estate investment trusts than before the rally, but REITs that hold apartment towers, hotels and self-storage units provide tempting opportunities, says analyst Mike Salinsky of RBC Capital Markets.
REITs were perilously close to the financial crisis: They own property, depend heavily on debt and cannot retain their earnings. As property values plummeted and banks pulled back on lending, REIT shares nosedived. As the bond and stock markets have reopened to REITs, investor poured back in to the sector. That’s left many investors wondering if they missed their opportunity, and rightly so, says Salinsky.
Most, if not all, apartment, hotel and storage REITs will see sales and profits decline this year and next. Rents are falling faster than prices, so the investment yield on companies’ property portfolios (which is, to some extent, what you get if you buy shares today) is dropping too. Add to that a volatile stock market, and the likelihood of further dividend reductions and the industry’s prospects l