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Three Red Flags for REITs

By Kevin Grewal, editorial director at SmartStops.net

NEW YORK (TheStreet.com) -- Over the past week or two, real estate investment trusts (REITs) have been the talk of the Street as many earnings reports beat analyst expectations, injecting even more optimism to a sector that has already been fired up.

As a result of relatively cheap property prices, low interest rates and ability to withstand the downfall of the real estate sector, many REITs have faced the threat of bankruptcy head on and beat it by selling stock and taking out additional loans. In addition to this, many prominent economists believe that the recession is coming to an end and consumers are going to start spending once again, making REITs attractive.

Although the entire sector has been in an uptrend since the lows in March when the S&P 500 hit a 12-year low, there are indicators that an uphill battle is still ahead. Unemployment rates are still unstable as the Labor Department recently reported that initial jobless claims for this past week increased to a seasonally adjusted 558,000, higher than expected.

Retail sales surprised economists by posting a decline of 0.1%, when they were expected to increase by 0.7%, marking the first setback following two months of modest gains. Lastly, home sales have been increasing, but many believe this has been fueled by tax incentives, the massive surplus of foreclosures and favorable lending rates, three things that probably can't be sustained.

Until more jobs are created than are lost, providing consumers with the income to spend, and businesses outperform Wall Street's expectations through growth and revenue expansion as opposed to cost-cutting measures, which will drive the demand for office space, REITs are not in the free and clear.

Here are a few equities that illustrate the sector's uptrend:

Vanguard REIT Vipers (VNQ), closing at $38.40 on Wednesday, a gain of 82% from its March low of $21.15.

SPDR Dow Jones REIT (RWR), rebounding nicely from a March low of $22.97 to close at $42 on Wednesday, an increase of 83%.

REITs have the same inherent risks as other equities, therefore, having an exit strategy can help mitigate these risks and preserve returns. According to the latest data from SmartStops.net, the price levels at which the upward trend in these equities could be in trouble are at the following: VNQ at $36.19 and RWR at $39.63. Keep in mind that these price levels change on a daily basis and updated data can be found at SmartStops.net.

-- written by Kevin Grewal in Laguna Niguel, Calif.

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