4 REITs Doomed for Failure?

This year was supposed to be anemic for real estate at best, terrible for commercial and retail real estate at worst. Yet somehow real estate investment trusts (REITs) have managed to shock investors, outperforming the broad index in both the first and second quarters. The SPDR Dow Jones REIT ETF (RWR) has shot up by nearly 17% in 2010, while the S&P is languishing somewhere between flat and 1% growth.

However, REITs aren’t out of the woods just yet. During the second quarter REITs saw a drop of about 4.3%, down less than the broad index, but still much worse than the first quarter. An analyst from Keefe, Fruyette & Woods has said that REITs have done well mostly “in anticipation of upcoming growth opportunities – internally, through improving fundamentals, and externally via acquisitions."

So this earning season is going to be a significant indicator of how well the sector will perform moving forward. Big-time players like Annaly Capital (NYSE: NLY  ) have already reported, and although dividends increased per share, earnings were down on a year-over-year basis. Annaly spin-off Chimera Investments (NYSE: CIM  ) has also announced second-quarter results, reporting increased earnings of $0.19 per share.

Many of our 165,000-strong CAPS community think REITs will continue to outperform the market; however, there are a few that have earned a dreaded one- or two-star ranking. Let’s take a look at these stocks and see if they have the ability to climb their way back up the ranking ladder:

Company

Sector

Market Cap

Recent Price

CAPS Rating

iStar Financial (NYSE: SFI  )

Credit services

$437.9 million

$5.22

**

Realty Income (NYSE: O  )

Retail

$3.4 billion

$33.15

**

MPG Office Trust (NYSE: MPG  )

Commercial office

$161.8 million

$3.34

*

Simon Property Group (NYSE: SPG  )

Retail

$26.9 billion

$93.53

*

Sources: Capital IQ (a division of Standard & Poor's), Motley Fool CAPS.

Commercial real-estate lender iStar Financial reported earnings today and is already down about 8% in early trading. The company posted a wider-than-expected loss due primarily to lower interest income, which fell by 39% and caused overall revenues to decline by 29%.

Realty Income, despite seeing its shares fall flat, announced a mixed report. Revenues increased slightly, but earnings fell by about 5%. Yield-chasing investors must have been happy though, as the company announced its 51st consecutive increase, bringing the dividend to a very respectable 5.4%.

Retail was also pretty kind to Simon Property Group, as it also just announced earnings that beat the street -- net income of $153 million compared with a loss a year ago. The company stated that boosted revenues were caused by higher occupancy rates and improving property sales. Simon Property also said it has about $6.1 billion in cash and available credit, which is interesting because it attempted to buy General Growth Properties (NYSE: GGP  ) earlier this year; could a different  takeover attempt be in Simon’s future?

MPG Office doesn’t announce its second-half results until Aug. 9, so investors should stay tuned to try and take the pulse of the commercial real-estate sector. So far, competitors Boston Properties and Brandywine Realty have offered up some uneven results, so MPG’s earnings will be interesting.

The foolish bottom line
Over the last year, the Vanguard REIT ETF (VNQ) has been able to generate a whopping return of 50%, head and shoulders above the gain of the broad market. Some REITs have obviously trounced the market, while others have floundered.

Do you think the four REITs above have what it takes to get rid of their lowly CAPS ranking, or are they doomed to ultimate failure?

Sound off in the comment section below!

Jordan DiPietro owns no shares of the companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2010, at 3:37 PM, weiwentg wrote:

    In my personal portfolio, Realty Income has been one of my biggest winners, up over 40% since I purchased shares in the $24-26 range. I'm confident in the company, although I don't think the shares are a buy today.

  • Report this Comment On August 04, 2010, at 5:10 PM, juliewulie wrote:

    I'm gonna make a million bucks $$$$$$$ on GGP!

  • Report this Comment On August 04, 2010, at 11:09 PM, will19699 wrote:

    Wall street does not match main street in my opinion. Commercial Real Estate is in trouble long term from the dot com and job losses. We do not need to go to shopping malls like we used to in the 1980's and 90's. Job losses have created huge vacancy rates in down town areas as well. REITS may beat earnings compared to the worst year in history: 2009. However long term they are in big trouble. REITS are not a growth sector, but rather a declining sector. I would not touch SPG above $40.

  • Report this Comment On August 05, 2010, at 1:39 PM, Acesnyper wrote:

    This is going to sound painfully simple but picked well I've always found a REIT is a good buy, in any market.

    Just been lucky with them myself dare I be foolish enough to say I'm any good at it. :)

  • Report this Comment On August 06, 2010, at 1:36 PM, goldnail wrote:

    I have been really happy with NLY and ANH and the Vanguard REIT fund. All the negative REIT chatter concerns me, and I think that any little budge on interest rates could cause a panic sell, so my caution flag is always up on these guys. Still I have been rewarded enough that a small loss won't hurt if they begin to sink.

  • Report this Comment On September 06, 2010, at 10:41 PM, infiniti01 wrote:

    I have owned (O) Realty Income Corp since 2003, and I have never lost money on this stock. The ride was a little scary during parts of 2008 and 2009, but amazingly the dividend was never cut and this stock fared much better than GGP. One thing I do know about Realty Income is that its main focus is long term leases, and their tenant retention is quite good. The title of the article is "4 REITs doomed for failure?"; therefore, I am wondering why would (O) be doomed for failure? Is there something I am missing or something I don't know? Judging by this stocks history, I don't think it will end up like GGP, and it's a very conservative company. I used to work in business banking, and Realty Income Corp was one of my banks clients. Based on my experience working with that company on occasions at the bank, and based on what I saw with that company, I am convinced to this day that the company is very strong going forward. Right now I think this stock is overpriced and I would wait to buy this one, and much of their property is financed with debt. If the economy falls in to a double dip as bad or worse than 2008 and 2009, then I will be a little worried; however, I don't think it will go bankrupt, and I hope I am not wrong on this. As for me, I am hanging on to this stock and I don't see any reason to dump it. This article hasn't convinced me that it might be doomed for failure.

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