Why are REITs falling so dramatically in the past few days?

[Rasec]

I was looking at my watch list and realized REIts are suffering badly:




What's happening in that sector?

[hendi_alex]

I think that in general they should be dropping hard. Under 4% yields for the biggest and best REITs is beyond ridiculous. I'll not touch them untill VNQ is yielding north of 5% once again. Yields are pretty good on most of the smaller REITs which is why I hold ROOF and KBWY. Eventually the REITs will suffer a 1-2 punch. First rising rates will make the shares less attractive. Secondly, rising borrowing costs will decrease margins and will hurt FFO. IMO REITs won't represent deep value for at least a couple of years. For that reason they will remain closer to the lower end of my 10%-20% weighting range.

[jim]

(09-01-2015, 08:40 PM)hendi_alex Wrote: I think that in general they should be dropping hard. Under 4% yields for the biggest and best REITs is beyond ridiculous. I'll not touch them untill VNQ is yielding north of 5% once again. Yields are pretty good on most of the smaller REITs which is why I hold ROOF and KBWY. Eventually the REITs will suffer a 1-2 punch. First rising rates will make the shares less attractive. Secondly, rising borrowing costs will decrease margins and will hurt FFO. IMO REITs won't represent deep value for at least a couple of years. For that reason they will remain closer to the lower end of my 10%-20% weighting range.

That would depend on how much interest rates going to go up, I suspect not much. Also, it is not always the case that REITs would drop when interest rates go up (http://charlessizemore.tumblr.com/post/1...he-rebound).

[rayray]

Interest rates will go up a little and the market will most likely punish the REITS creating a better buying opportunity. REITS will be fine, even after rates increase. And as leases expire they'll be negotiated at higher rents.

[hendi_alex]

I think that a single rental property can be used as a simple model for most REITS. If the rental income covers loan payment, expenses, taxes, and insurance, then the property generates free cash flow. High interest rates make the rental property less attractive as the easy, risk free income from CDs becomes a more attractive choice. If financing costs rise, that also takes away from the free cash flow generated. While most REITs will likely survive a period of rising rates, their stocks will be less attractive compared to risk free alternatives and as financing costs increase, free cash flow will be affected for most of the REITs. Most likely spreads will continue to be favorable for some time, but when rates move closer to historic norms, the sector will bleed some serious red. To me that risk is modest in the near future, but the direction is shifting from favorable to less favorable. To me, that means lighter weight, proceed with caution. My current sentiment remains 10% weighting, but with any hint of inflationary pressure will probably reduce to 5% weighting. Won't consider overweight untill interest rates seem to be peaking, which is probably many quarters into the future.

[jim]

Thanks for the insight. Thinking they have been bleeding long enough, in anticipating the rising rates, I started a few positions in this space with the expectation that rates will not go up much in this environment (but this is the first time I looked at REITs)

[hendi_alex]

I had moved 100% out of REITs for some time, and only started accumulating in the past few months. On average I'm down about 8%-9% since entering. I doubt that I'll ever totally exit again, but when the headwinds are too great, will likely drop down closer to 5% weighting. Sure REITs have dropped in anticipation, but by historical standards the prices for many, especially the stronger companies, are still quite bloated. A more significant hit will likely come with the first over sized jobs report, and then a second hit will take place when the rate increases are actually implemented. After that, my guess is that REITs will be treated more individually, based upon their ability to turn FFO in a tougher market. That will be one time to cherry pick, and then the next big buying opportunity will come near the end of the rate raising cycle. After cuts are announced will be too late, as prices will already have made a big jump.

[Kerim]

I'm tempted to grab a little more OHI today. My REIT exposure is still only about 6.5 percent, and yield at the moment is 6.7 percent.

[jim]

(09-02-2015, 10:18 AM)Kerim Wrote: I'm tempted to grab a little more OHI today. My REIT exposure is still only about 6.5 percent, and yield at the moment is 6.7 percent.

Can I ask how long have you been accumulating yours?

[Rasec]

I currently have O and HCP and they make about 14% of my book and I was considering starting a position on OHI and/or WPC but I don't want to be too leveraged on REITs. On the other hand I'm just starting and I'm in this for the real long run, so risk is low.

[Kerim]

(09-02-2015, 10:59 AM)jim Wrote:

(09-02-2015, 10:18 AM)Kerim Wrote: I'm tempted to grab a little more OHI today. My REIT exposure is still only about 6.5 percent, and yield at the moment is 6.7 percent.

Can I ask how long have you been accumulating yours?

Happy to share.

OHI is a newer holding for me. Bought my first pile on 7/2 for $34.99 a share. Second pile 8/25 for $34.33 a share. By value, it makes up 1.5 percent of my DG portfolio, so I have plenty of room to add more and would be excited to average down my price per share.

As for REITs generally, I've been buying those since early 2012. I currently hold NLY, VER, O, HCP, and OHI. All together, they only account for 6.5 percent of my DG portfolio by value. I'd be comfortable raising that to 10 percent or maybe even higher. I love OHI and HCP and the like because they expose me to both healthcare and REITs. I struggle between just accumulating more of the ones I've got (and am comfortable with) and diversifying into a few other REITs.

[jim]

Thanks for sharing, your stock picks and discipline. and am happy to see what I currently have, O, HCP and OHI, are on your list. I like healthcare related REITs too, having seen hospital campuses being built all over Houston metro and the nearby Texas Medical Center.