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:



Market Cap

Recent Price

CAPS Rating

iStar Financial (NYSE: SFI)

Credit services

$437.9 million



Realty Income (NYSE: O)


$3.4 billion



MPG Office Trust (NYSE: MPG)

Commercial office

$161.8 million



Simon Property Group (NYSE: SPG)


$26.9 billion



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.