Our Attitude Toward REITs

  1. After an average share price appreciation of 25% over the last twelve months, U.S. equity REITs now seem to be fairly valued or even overvalued.
  2. In anticipation of creating a real estate group within the S&P 500, there’s discussion as to whether REITs will reach a new multiple level.
  3. However, there is a chance Janet Yellen will increase interest rates by a quarter of a percentage point again, prompting new selloffs.
  4. If there is enough of a dip to make this a buying opportunity, we will open a position.

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We are definitely in any different a situation than we were at this time last year. In August 2015, the market was debating whether or not the Fed would initiate the interest hike, which have prompted a selloff later in the month. Following an average share price appreciation of 25% over the last twelve months, U.S. equity REITs now seem to be fairly valued or even overvalued.

In anticipation of creating a real estate sector within the S&P 500, there’s discussion as to whether REITs will reach a new multiple level. Some argue that the inclusion will make fund managers and institutions inch up their REIT stake in portfolios benchmarked by S&P 500. However, the more we look at it, the more we are convinced that this is a moment to evaluate positions and possibly take profits or hold.

However, there’s always the chance Janet Yellen will increase interest rates by a quarter of a percentage point again, competing with REIT yields and prompting new selloffs. REIT specialists might complain that REITs offer more than the yield, but this is how a significant portion of investors see REITs. While it’s not possible to go against the market reaction, we might take advantage of a potential selloff to buy new positions.

So, here’s what we are doing right now. We’re examining Q2 results, checking prospects and multiples, and if there is enough of a dip to make this a buying opportunity, we will open a position.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

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