In the past 20 days, shares of real estate investment trusts have been blown out of the sky. REITs focused on skyscrapers, malls, hospitals and apartments plunged in sync with bonds after a strong jobs report suggested that an improving economy may make interest rates rise.
Veteran observers say the normally dull group has never experienced a period of such volatility -- and certainly never lost as much value in as short a period of time. Industry standout
Chelsea Property Group
(CPG - Get Report)
, which has posted only one down year in the past decade, sank 20% from April 2 to April 14. Diversified land developer and manager
, another stellar long-term performer, fell 17%.
Does this make sense? Probably not.
REITs are appealing to investors largely for their fat dividend yields, typically north of 5%. But during the selloff, bears theorized that rising interest rates would make those yields less attractive in comparison with risk-free government bonds. They also figured that higher rates would goose operating expenses at the real estate companies, cutting both yields and earnings.
It's hard to argue with the market when it's making such an emphatic call, but the panic selling may have provided cooler heads with a rare opportunity to buy some of the strongest companies in America at a discount. Indeed, if you have a contrarian bent and a longer time horizon, then REIT should stand for "Rather Enticing Investment Today."
An improved economy, after all, should make most REITs more valuable, not less. Let's take a look at what these companies do, and which should be purchased in this decline.
Don't Mistake REITs for Bonds
Real estate investment trusts are basically companies that own space and charge rent. They aren't homebuilders or commercial developers. They are property owners that specialize in niches such as hospitals, downtown office buildings or shopping malls. Income-seeking investors like REITs because they are required to distribute at least 90% of their income in the form of dividends. But in recent years, investors seeking capital gains have flocked to them, too, as stable, rising rents have provided substantial capital gains.
Chelsea Property, a mid-cap company that owns high-end outlet malls around the country, has advanced 21% per year in the past decade. That's much better than popular growth stocks like