REIT Stocks: What We Learned About This Week’s Selloff by Heli Brecailo, editor of GilverBook

Summary

  1. The recent selloff affected REIT stocks with greater intensity.
  2. No particular sector or size was targeted, so impact was across the board.
  3. Rebound was uneven and some sectors rapidly recovered.

Signs of weakening in China’s economy have led to a rollercoaster in the financial markets this week, and it’s been no different for U.S. equity REITs. From an initial selloff to almost-redemption in the end, we witnessed major losses on Monday to a lesser degree of loss on Tuesday to a hefty recovery on Wednesday and Thursday. Friday was a lukewarm day. REIT stocks, indices, and ETFs suffered from the swings of the market much the same as other widely traded securities did, from the moment the market waited to plummet until the final hour of operations on Tuesday.

Investors — who view REITs as long-term investments — have been appalled by these fluctuations, which displaced momentum, washed away gains, and took the RMZ (MSCI US REIT Index) back to the levels of October 2014. While some people don’t view this volatility positively, we believe that overall REIT prices needed to come down; some valuation metrics had been much higher than the historic norm.

REIT Stocks

REITs suffered more

The truth is that, perhaps because of fears surrounding the effects of rising interest rates, REITs suffered more from the selloff. REIT stocks, which had been on track for a gradual comeback, have yet again done poorly, with a median drop of 3.0 percent for the 175 stocks we follow. MSCI US REIT (NYSE:^RMZ), a prominent index, fell 3.1 percent, and Vanguard (NYSEARCA:VNQ), a popular REIT exchange traded fund (ETF), fell by 3.1 percent as well. The S&P 500 and Dow Jones Industrial Average also plummeted, but have rebounded to where they were last week and are now slightly up.

Selloff affected all sectors

No single REIT sector has been spared. The selloff affected some sectors more than others, but the drop occurred across the board. Out of the eleven sectors we track, the median returns for the selloff (Monday and Tuesday) were between Manufactured Homes, which dropped 4.9 percent, and Office, which fell by 8 percent.

Selloff affected all sizes

Regardless of market capitalization, large, mid, and small caps have been affected by the selloff the same way. REITs with market cap between $100 million and US$1 billion fell by 2.4 percent, market cap between US$1 and 10 billion by 3.1 percent, and market cap above US$10 billion by 3.0 percent.

Top 10 Best Performing REIT Stocks This Week

REIT Stocks

Rebound was uneven

All sectors reacted positively to the market from the middle to the end of the week, but some rebounded more rapidly. We’ve noticed stronger recovery for Infrastructure, Lodging, Manufactured Homes, Data Centers, and Apartments. Most of these have demonstrated good industry fundamentals and been on investors’ radars for a while.

The rebound in Lodging, however, was a considerable surprise because this sector had been pounded by the market over the past weeks. While it’s true that the Ashford Hospitality Prime (NYSE:AHP) spiked 16 percent on Friday due to announcement of a strategic review, the whole sector reacted well to the selloff — perhaps because the market is tired of punishing a sector that demonstrates robust fundamentals. Even if you exclude AHP’s effect, the outcome for the sector as a whole is positive.

Healthcare, Industrial, and Office haven’t recovered as much, and accumulated losses in the 4 percent range.

Dividend Yield In Healthcare Reached 6 Percent

REIT Stocks

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Little to do with REIT fundamentals

The good news is that what happens abroad has little effect on domestic market REIT fundamentals. Indeed, none of the reasons for this selloff — the weakening Chinese economy, new developments in Greece, and recession in Brazil — should change the long-run trajectory of REIT performance, although some REITs have minor investments in China.

Price of liquidity

The truth is that equity Real Estate Investment Trusts, equity REITs, can be an odd beast. Despite being long-term investments, they enjoy the liquidity of the markets; on the other hand, they are therefore subject to the same fluctuations and market volatility as other traded stocks. In some cases, especially when compounded with concerns about rising interest rates, that volatility can be demonstrated more aggressively.

Looking ahead, there might well be new volatility around the corner. Back from summer vacation, the financial markets await the Fed’s indication about a possible increase in interest rates. Some investors have made the case that there’s no environment for such a decision this year, but Fed members haven’t discounted the possibility of a hike. The next FOMC meeting occurs in mid-September, a week after Labor Day. Nobody knows for sure what will happen between now and then. Therefore, right now, we can suggest only to take this opportunity to kick the tires and purchase good, cheap REIT stocks.

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About the author

Heli Brecailo is the editor of GilverBook, a newsletter focused on REIT stocks. He graduated from MIT’s Sloan School of Management in 2008 and has extensive experience in managing real assets investments. He is a CFA® charterholder, and has worked in several sectors within the Financial Services Industry, including Investment Management, Investment Banking, and Commercial Banking.

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on August 28, 2015 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of July 31, 2015, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.