23_10_31 A post it note with the word dividends on it next to a roll of cash _MF Dload
The average real estate investment trust (REIT) is roughly 5% below its 52-week high, using Vanguard Real Estate ETF (NYSEMKT: VNQ) as a proxy. That’s a vast improvement from where it was not too long ago, down over 20%, but investors shouldn’t think the investment opportunity in REITs has passed. If you go back more than a year, you start to see that net lease REITs like NNN (NYSE: NNN) and tiny peer Alpine Income Property Trust (NYSE: PINE) still have more ground to make up.
REITs got smacked by interest rates
The past year was filled with interest rate increases. But the trend didn’t start over the past 12 months — it goes back a little further than that. For example, if you look at the past three years, you’ll see that the average REIT is still down a bit more than 20% from its highs over the span. In other words, there’s more opportunity here than may at first meet the eye if you step back and consider the broader picture.
VNQ Chart
Two REITs still worth taking a look at are NNN and Alpine, which remain down around 15% or so from their three-year highs. Before looking at each stock, it will help to understand why rising interest rates were such a problem for their stocks. The first issue is that REITs compete with other income options, like CDs. As rates rose, investors moved cash to virtually risk-free bank CDs because they could get yields as high as 5% without having to take on the inherent risk of owning a stock.
There are also operational issues that REITs have to deal with on the interest rate front. Most notably, REITs often issue debt when they buy assets. Thus, rising rates make it more costly to do business. Although property markets eventually adjust to higher rates, it can take a long time for that to happen. Basically, sellers tend to cling to high prices until they have no choice but to sell (usually because of maturing debt that has to be rolled over at higher rates) at whatever price will clear in the market. So there is a real business headwind today for…
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