Consider Equity REITs For Your Next Investment

Real Estate Investment Trusts (REITs) that invest primarily in equity (land, buildings, and equipment) have been solid long term investments for several decades. While there are always a few bad apples in the barrel and economic conditions sometimes conspire against investors, equity REITs (eREITs) have generally provided investors with steady long term returns.

However, eREITs had grown expensive as a result of interest rates reaching historically low rates over the last 9 years. Investors primarily rely on eREITs for a steady and growing income stream which competes with bonds.As bonds got more expensive, so did eREITs.

Over the last few months, interest rates have accelerated upwards, bond prices have fallen, and so have the prices of eREITs pushing their dividend yields higher.Unlike bonds which have a fixed coupon, eREITs have the ability and the history of raising their distributions over time. While bond prices are fixed by their coupon rate and maturity date, eREIT valuations increase over time by growing their asset base and through increasing lease rates on the properties and equipment they provide to their tenants. This has allowed eREITs to perform well in rising rate environments despite the initial market response to lower eREIT valuations.

The recently passed legislation changing the Federal income tax code will benefit corporations through a lowered corporate rate, will lower most taxpayers individual rates and total income tax bill, and will directly benefit eREIT investments. The new tax legislation provides yet another reason for investors to consider eREITs as an integral part of their portfolios.

The balance of this article provides more detail on the relationship between interest rates and eREITs, provides a summary of the new tax legislation impact on eREIT investors, and provides a list of eREITs for readers to consider adding to their portfolios.

REITs and Interest Rates    

Investors and market pundits often take the view that a rising rate environment leads to degraded eREIT financial performance. The data does not show this to be true.

REITs are often thought of as bond proxies because of their steady distributions to investors. As mentioned in the introduction, REITs have the ability and the history of increasing their asset base as well as raising their distributions to investors even when interest rates are on the rise. The three charts below provide historical REIT performance during various periods of increasing interest rates.

This first chart below shows total US REIT performance during the last Federal Reserve tightening cycle as the Federal Funds Rate was being increased (similar to the current Fed tightening cycle).

REITs and Treasury Yields

Source:  Cohen & Steers

The blue line in the chart shows the total return for US REITs over the same period of Fed tightening. During that cycle, REITs provided a total return of nearly 58%. The next chart below shows the return of stocks and REITs for three periods before and after a Fed tightening cycle.

REIT Returns Federal Funds Rate

Source:  Cohen & Steers

The chart above clearly shows that while stock and REIT returns are both subdued in the three months immediately before and after a Federal Funds Rate tightening cycle, the performance of REITs picks up significantly after 6 months and even more significantly after 12 months. The final chart below shows the cumulative total return for REITs during various periods of rising rates.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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