REIT World 2015 Recap: Time To Stock Up Durable Dividends

Real Estate Investment Trust (or REIT) fundamentals appear healthy according to participants at REITWorld 2015: NAREIT’s Annual Convention for All Things REIT.

REITs, known for their high-paying dividend attributes, have benefitted from their predictable earnings and dividend growth, yet for most of this year shares have underperformed – Equity REITs have returned -1.11% year-to-date compared with +1.45% for the S&P 500.

Much of the overhang for REIT shares has been the uncertainty related to the potential impact, or perhaps fear, of rising rates. However, most analysts at REIT World 2015 agree that REIT share prices are already baked into their share prices such that a modest uptick in rates should have little to no impact to REITs.

Mike Kirby, chairman and director of research at Green Street Advisors, explained that 2015 “might be the best year ever in the last 25 years for fundamentals on a net operating income (NOI) basis .” If the current low, but positive, growth environment continues for the next five years, he said, “we should be happy. REITs will do just fine.”

REIT fundamentals are sound as new commercial real estate supply remains generally in check, with only certain geographic pockets and real estate sectors set to experience an uptick. Scott Schaevitz, managing director and co-head of Americas real estate banking at Barclays , added that he does not expect any disruption in fundamentals for the next two to four years. “It feels good, but I’d like to see more growth from the rest of the world,” he said

Most participants at REIT World agree that real estate has a few more innings remaining – maybe 4 to 5 more innings compared to a 9 inning game. That means that the more recent slowdown in 2015 could be viewed as a 5th inning leg stretch, allowing time for investors to reset their portfolios and add more REIT shares in a period of price weakness, or what Benjamin Graham would refer to as a “margin of safety”.

Timothy Naughton, chairman and CEO of apartment REIT AvalonBay Communities, Inc. (NYSE: AVB), said he does not see many signs of imbalances. He estimated that the real estate market is somewhere past the halfway point of the current cycle.

Most management teams at REIT World 2015 appear upbeat about business prospects for the remainder of 2015 and have taken a cautious stance looking forward to 2016. The debt markets have broadly returned to normalcy, with just a modest increase in total costs with the rise in benchmark interest rates.

Although the timing regarding rising rates is uncertain, the commercial real estate market conditions present an attractive environment for investors to begin to gain more access to the REIT sector in which shares are trading at fair value. Kirby said he recommends that investors increase their REIT allocations since most are “dramatically under-allocated” to REITs. According to Kirby, “if you’re not at a 10 percent to 15 percent REIT allocation, you’re probably light .”

In my newsletter, Forbes Real Estate Investor, I provide coverage on around 100 U.S. Equity REITs. For more information CLICK HERE.

Brad Thomas is the Editor of the Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business and he is currently writing a book, Trump: It’s ALL Business, about U.S. presidential candidate Donald J. Trump.