REITs Yields Too Low
Posted on Thursday, September 20th, 2007 | In Current Market NewsWe have been expounding our view that REITs are overvalued since January of this year. We continue to believe that is the case, even in the face of yesteday’s Fed rate cut and strong rise of REITs.
January 29: Mean Reversion Ahead
August 15: REITs Not Yet at Fair Value
August 16: 35 Years of Yield Spreads – REITs to Treasuries
September 16: REIT Price Return Way Ahead of Yield Return
REITs are well below their historic yield levels which suggest mean reversion will bring their prices down unless they can substantially increase cash flow and distributions.
REIT yields are below 10-year Treasury yields, which has occured only 1/3 of the time over the last 30 years, and most of that was a long ago. Either REIT yields must rise or Treasury yields must fall to restore dominant historic relationships. Even though the Fed cut short-term rates yesterday, the 10-year Treasury rates increased while REIT yields fell, increasing the misalignment.
In the past, we have based our studies on REIT indices and the ETFs that represent them (principally VNQ, IYR and RWR). To be more granular, in this study we look at the two largest market-cap REITs in each of the four major categories: Office, Retail, Industrial and Residential.
The following table identifies those key REITs. It also provides the web address of each company to assist you in your own research.
The next chart graphically shows the historical and current annualized yield of the key REITs versus the 10-yr Treasury yield:
You may find prefer to see the same data in tabular form:
We have to admit that it was difficult to hold our view while watching REITs rise 2% to 4% yesterday. However, our longer-term view compels us to wait for a better buying opportunity based on yield comparisons to REIT history and current 10-year Treasuries.
Unfortunately, logic doesn’t always prevail in the short-term. In the short-term, if the market wants to go in a particular direction it will, at least for a while. Ultimately, though, logic does prevail — we just don’t know when.
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 About Richard Shaw (http://www.QVMgroup.com)
Richard is a principal of QVM Group LLC, a fee-based investment advisor based in Connecticut with clients across the country. He provides investment coaching to "do-it-yourself" investors, and manages portfolios for those who prefer not to make their own decisions. His investment approach is based on value, asset allocation, benchmarking, expense control, risk management, customizing portfolios to each client's specific circumstances, and regular communication about strategy and performance. The QVM Group team also provides municipal refinance services, strategic business planning and financial analysis service for new ventures, private acquisition analysis, and custom investment research. Richard's extensive experience, includes serving on the Board of Directors of Aberdeen Asset Management PLC (London Stock Exchange: ADN), membership on the Board of Directors of Phoenix Investment Counsel (renamed Virtus Investment Advisors), a U.S. pension manager and investment advisor to the Phoenix Funds (renamed Virtus Funds), as well as serving as Managing Director of a series of offshore investment funds based in Luxembourg. He has led institutional asset management sales and had overall responsibility for management of a U.S. mutual funds broker-dealer. He was a charter investor and member of the Board of Directors of several internet companies, including Lending Tree prior to its IPO. He is a graduate of Dartmouth College. QVM Group LLC is a Registered Investment Advisor. Visit the QVM Group website http://www.qvmgroup.com/QVMinvest/ |
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