Real estate investment trusts have finally joined other forms of real estate in investors' doghouse. Except for the occasional buyout, such as the announcement last week from Income Investor selection Equity Inns (NYSE:ENN), REIT prices are getting trimmed across the board.
Top-tier names such as Kimco (NYSE:KIM), Boston Properties (NYSE:BXP), and Public Storage (NYSE:PSA) are all down at least 25% from their highs. Those highs, of course, largely priced in a rosy outlook for commercial real estate, but knock 25% or 30% off of a stock price, and things don't have to go perfectly for an investment to work out well.
Some REITs are still better than others, but when a whole sector goes on sale, it's always a good time to start building up a watch list of favorites. As always, you have to do your homework. You'll want to not only look at yields and yield coverage, but also funds from operations, net asset values (NAVs), and the quality of the properties and the tenants. Even if REIT shares are in for a prolonged slump, the stronger franchises among them will retain their healthy cash flows and dividend payments.
If some REITs fall another 20% to 30% from current prices, they'll start to be attractive on a discounted dividend basis. That's admittedly quite a fall, given the dip many REITs have already seen. But if they hit these valuations, they'll be impossible to ignore, even if the near-term outlook turns out to be as bad as some are saying.
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Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
