Is Now the Time for US REITS

March 14th, 2010 value investor 8 comments Print Investment Article Print Investment Article Email Investment Article Email Investment Article

investREIT-main_FullEvery industry faces periods of rise and periods of decay. The last few years have, not surprisingly, been a period of decay in the REIT Area. But like nuclear stocks after 3 mile island, or banks after the savings and loan scandal, or bonds after the junk bond era, after a sector has been decimated what is often left are the high quality well managed companies that will rise to dominate the sector in the future. Is now the time for REITs?

For those not familiar with REITs they are otherwise known as Real estate invest trusts. The basic rule that governs their operations is that they give 90% of all revenues from a period back to shareholders in the form of a dividend. There are three key classes:

  • Equity REITS: Invest in property and gain revenues from collecting rent.
  • Mortgage REITS: Loan money for mortgages or buy and sell mortgage backed securities.
  • Hybrid REITS: You guessed it, they do both.

I am not a big fan of Mortgage REITs, in my opinion they partake in the buying and selling of paper. Paper that is difficult if not impossible to assess its true value. For those more in the know these types of investments may make sense. I follow Buffett’s advise when it comes to these matters, if you can’t understand it then don’t buy it.

So that leaves us with Equity REITs. These REITs employee people who specialize in real estate industry they understand the simple formula (rent – upkeep) > mortgage. With housing prices depressed all across the US those companies that are still alive in this sector are starting to gather steam and acquire great properties. Regardless of what happens over the next few years people will still need properties to rent. Unless you believe that housing prices have a significant way to fall yet this is certainly an interesting sector to examine.

To further diversify there are several ETFs that deal with REITS if we look at each of these compared with the S&P over a two year and five year periods the industry is quite depressed from its highs.

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To be clear I am not advising you date the REIT sector, but if you are looking to diversify your portfolio and hold a stock or ETF for 10 years it might be a good time to look at this sector.

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8 responses to “Is Now the Time for US REITS”

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    Mariusz Skonieczny

    REITs definitely own assets that satisfy a very important need depending on whether they cater to renters or commercial tenants. I particularly like apartment REITs more than any other type because when people lose their homes, they have to live somewhere and the most obvious choice is renting. The thing that bothers me about REITs is that so many of them carry so much debt.

    value investor

    Thanks for the comment!
    The debt numbers out there right now are still shocking. This is one of the problems I do have with REIT ETFs they tend to bring together residential and commercial into one pile and the quality can be suspect- sometimes a big shovel is necessary to get through all the junk.

    Weekend Reading Links – March 21, 2010 | Desktop Stock Ticker

    […] Buy Value presented Is Now the Time for US REITS […]

    Dividend Disciple

    The real question is should you have waited until now? I’m up over 80% for the TTM ended Feb 28 buying the Vanguard REIT index fund via an employee sponsored 401k plan. From the markets low on March 9 to date, REITs have largely outperformed the S&P. VGSIX up over 120%, while S&P up less than 80%. Thanks for the article.

    On the Equity REIT side – interested in what you’re thoughts are on storage, possibly PSA.

    value investor

    Nicely done- congrats on the return!


    Here is an interesting investopedia article on valuing REITS. It says to use Funds From Operations instead of net income, as depreciation and sales of properties can cloud the view of an REIT’s dividend paying ability.


    Hey! You called the bottom of the market. Anyone who invested in REITs when this article was published should be up about 100% by now.

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