James Dennin, Kapitall: Two major REITs merged this week. Does this signal upcoming changes in the sector?
REITs can add real estate to your portfolio. Because who
wants to deal with tenants directly?
Two major Real Estate Investment Trusts (REITs) merged this week, American Capital Reality
Properties (ARCP) and Cole Real Estate Investments Inc. (COLE).
Read more on REITs from Kapitall: 5 REITs that Might be Ready to Rise
Both fit into the same niche, so-called net-lease investment trusts, which means they own
property leased to single, large tenants like Walgreens (WAG) or McDonald’s (MCD). Combined,
they will easily create the largest security in the sector.
The two REITs, once the second and third largest, will dwarf what is now the second
largest trust, Reality Income Corp (O) by a factor of two.
- The deal is said to be worth over $7 billion.
- The new REIT would control almost 4,000 properties
- This creates a combined enterprise value of over $21 billion.
REITs are an interesting breed of securities. They are traded on public exchanges, but aren’t
necessarily companies – they don’t make anything.
The best way to explain REITs is to say they’re a kind of mutual fund for real estate interests.
They buy land and developments, and then either re-sell them after renovations or lease them
out to tenants.
Since they’re sort of like corporate landlords, REITs are carefully regulated with regards to profit.
By law, 90% of their margins must be redistributed to shareholders.
So it’s easy to see why REITs have become highly popular in the last few years – and they often
pay very high dividends.
But the merger speaks to some new problems REITs might soon face. As securities, their share
price is susceptible to a number of factors.
- If unemployment goes down, some REITs stand to benefit as more people can afford to buy or rent larger homes.
- On the flip -side, low unemployment is likely to lead to faster tapering from the Fed, and with that comes higher interest rates.
If that happens REITs holding mortgages (mREITs) or ones that are diversified could be in trouble
as well. Some analysts are even advising that you avoid the sector all together.
To shed some light on this volatile, befuddling, yet often lucrative sector – we ran a screen on
the full universe of REITs.
We looked at them regardless of sector, and instead limited our results by size and dividend
payout. Larger securities are often better equipped to handle a crisis. So we looked for large-cap
REITs with dividend yields of at least 3%.
We were left with 5 REITs on our list.