This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Time to revisit REITs for income in 2014?

Stocks in this article: AGNC NLY RWR VNQ

By Xavier Brenner

reit

It has been a tough year for investors in real estate investment trusts (REITs). The market's obsession about when the U.S. Federal Reserve might start tapering its level of monthly bond purchases has hit the value of REITs, which some investors and analysts believe are very sensitive to interest rates.

But is that really supported by the data? A case can be made that REITs often do perform well in times of rising interest rates. What's more, other factors—property market fundamentals, economic growth and strong liquidity—can often trump adverse movements in interest rates.

There's no denying that REIT exchange traded funds such as the Vanguard REIT Index (VNQ) and the SPDR Dow Jones REIT (RWR) have been hammered since May when the Fed first hinted that it may start to dial back on its $85 billion in monthly bond prices, which could place upward pressure on rates.

VNQ Chart

VNQ data by YCharts

In theory, higher rates are bad for REITs because debt-servicing costs rise on properties and there's less free cash to invest. In October, John Gerard Lewis, who runs the Covestor Stable High Yield portfolio, sold off all of his holdings of mortgage real estate investment trusts (mREITs). As he explained at the time:

In light of the Fed's mid-summer suggestion that its bond-buying program could start to wind down in September, a certain amount of volatility was removed from the portfolio by selling all holdings of mortgage real estate investment trusts (mREITs). The mREIT allocation had been particularly damaged by the rise in rates and the Fed's indication that tapering of its bond buying would soon occur.

Goldman Sachs recently issued a sell rating on two big agency mortgage REITs, Annaly Capital Management ( NLY) and American Capital Agency Corp. ( AGNC). "While agency mortgage REITs have already significantly underperformed the market this year… we think investors and sell-side analysts have been slow to realize the downside potential," according to the Goldman report which was excerpted by Michael Aneiro at Barron's.

NLY Chart

NLY data by YCharts

So why would anyone go near REITs in 2014? This year aside, REITs do have a decent long-term track record of performance. Publicly traded equity REITs, over a three decade stretch through March 28, 2013, outperformed the S&P 500 (SPX), Dow Jones Industrials (DJIA) and NASDAQ Composite (NDX), according to data compiled by the National Association of Real Estate Investment Trusts.

In September, Fidelity Investments sent a research note to clients pointing out the diversification benefits of REITs in an investment portfolio and suggesting investors think about more exposure to "commercial property through REIT stocks, particularly in multi-asset-class portfolios."

Why? During the past 20 years, an allocation to REIT stocks would have boosted the risk-adjusted returns of a portfolio including U.S. stocks and investment-grade bonds, according to Fidelity. Of course, REITs sold off hard with U.S. stocks and many other asset classes during the financial crisis.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,340.78 -46.43 -0.27%
S&P 500 2,024.38 -5.17 -0.25%
NASDAQ 4,689.5240 +8.0270 0.17%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs