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TheStreet Open House

Focus on REIT Fundamentals

NEW YORK ( TheStreet) -- Losses occur when risk meets adversity, and based upon the last few weeks, it's clear that real estate investment trust investors are beginning to fear the worst.

The latest Federal Reserve announcement that it might scale back quantitative easing has prompted many REIT investors to take a profit and sit on the sidelines until the overhyped markets settle down.

The REIT selloff is an indicator that record low rates won't last forever. Nonetheless, the current earnings multiples for U.S. REITs reflect strong growth, and so their seemingly higher valuations remain reasonable.

Contrary to common misconception, rising interest rates don't necessarily lead to poor REIT performance. REITs have generated an annual return of 12.6% over the six monetary tightening cycles that have occurred since 1979. Over an equal number of periods when Treasury yields were rising, REITs generated an annual return of 10.8% (source: Cohen & Steers).

It's no time to depart from the course, especially when it comes to minimizing risk or avoiding losses, even though rising interest rates can affect real estate values and the performance of REITs.

Through diversification, investors seek to minimize volatility, and the high and steady dividends distributed by REITs can play a large role in asset allocation. Accordingly, investors should stay the course with diversified investments in stocks, bonds and real estate.

The Most Important Thing

REIT dividends are arguably the most important attribute for investors because REITs generally have more stable dividend streams than other asset sectors. REITs offer above-average dividend yields due in large part to the minimum distribution requirement for companies structured as REITs as REITs must pay out at least 90% of net income in the form of dividends. They also have a history of consistently raising their dividends, resulting from cash-flow growth that comes from rising rents and occupancies, or from development and acquisitions, or both.

Historically, REITs have offered higher dividend yields than other equities with similar risk profiles -- REIT dividends have been a large factor in the outperformance of real estate securities relative to the broad equity market. On average, REIT dividends make up 60% of the returns for U.S. REITs, much more than those of the broad equity markets.

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