REIT Shares Ripe for Slowdown

Mills Corp (MLS Quote) plunged nearly 15% after the mall developer delayed its earnings release and said third-quarter results would come in "substantially below expectations."

Apartment REITs sagged after AIMCO (AIV Quote) reported lower-than-expected FFO and said higher heating costs could hurt its operations for the remainder of the year. AIMCO shares fell 3.6%. Equity Residential (EQR Quote), meanwhile, fell 3.4% after the apartment owner's third-quarter FFO per share missed Wall Street's forecast by a penny, partly due to hurricane costs.

Going forward, the best scenario for REITs may be for the broader equity markets to continue to disappoint. So far this year, the Dow Jones Industrial Average and the Nasdaq are each off 4%, and the S&P 500 is down 1%, as of Monday's close. Meanwhile, the index of all equity REITs is up 7% year to date, according to SNL.

"If you're worried that the economy is slowing down on the earnings side, then REITs should hold up better than the general economy," says Jeung Hyun, a principal with Adelante Capital Management, which runs the (LLUKX Quote) Adelante U.S. Real Estate Securities fund.

On the flipside, if general corporate earnings grow at a faster rate than REITs', then the sector could prove disappointing in the short term.

However, as a long-term investment, many say REITs are a good portfolio diversification tool. Over the long term, investors in REITs should expect dividend yields of about 6% with low single digit earnings growth, says Lindemann of SNL. "Over time, you should look for total returns in the neighborhood of 10% to 12%," he says.