The real-estate sector has been the best performer in the S&P 500 Index over the past 12 months.

Earlier this month, a similar review identified the utilities sector as the 12-month winner through Oct. 1. But through Oct. 22, real estate is the 12-month champion among the S&P 500

SPX, +0.19%

 on a total-return basis (with dividends reinvested).

Before getting into real-estate companies’ performance, here are the main sectors in the benchmark index:

S&P 500 sector Total return – 12 months through Oct. 22 Total return – 3 years Total return – 5 years Total return – 10 years Total return – 15 years Weighted aggregate dividend yield
Real Estate 32.0% 42% 67% 297% 285% 2.99%
Utilities 22.8% 49% 74% 216% 343% 3.07%
Information Technology 16.1% 84% 140% 369% 473% 1.47%
Consumer Staples 15.5% 28% 53% 207% 334% 2.81%
Consumer Discretionary 13.7% 58% 98% 398% 384% 1.33%
Communications Services 12.4% 19% 33% 158% 177% 1.35%
Financials 11.4% 53% 71% 175% 77% 2.20%
Materials 11.0% 29% 32% 128% 206% 2.23%
Industrials 9.5% 42% 63% 246% 256% 1.94%
Health Care 3.0% 39% 58% 281% 349% 1.79%
Energy -14.1% -8% -18% 25% 120% 4.10%
 
S&P 500 Index 11.0% 49% 72% 238% 273% 1.97%
 Source: FactSet

Attractive dividend yields are the obvious connection between the real-estate and utilities sectors. The energy sector also sports a high aggregate dividend yield. However, oil-price uncertainty continues to weigh heavily on energy companies.

It’s also worth pointing out that the real-estate sector’s performance has typically been good or better when compared with other sectors over long periods.

Reasons for outperformance

The flight to yield continues. The yield on 10-year U.S. Treasury bonds

TMUBMUSD10Y, +0.01%

 has fallen to 1.75% from 3.20% a year ago, and Bloomberg has estimated that the total debt in Europe and Japan with negative yields to maturity exceeds $17 trillion.

In his daily “Out of the Box” opinion piece Oct. 21, B. Riley FBR chief global strategist Mark Grant wrote that many large institutional investors are “going through massive reallocations of assets programs, as they try to deal with lowered bond returns.” This means a continued flow of money into the U.S., with higher-yielding securities being especially attractive.

With the Federal Reserve cutting short-term rates twice recently and reversing its decision to shrink its balance sheet earlier this year, along with continued stimulative central bank policies in other developed economies, there’s no reason not to expect the big money flow to continue, along with plenty of support for shares of real-estate investment trusts.

S&P 500 REIT stocks

The S&P 500’s real-estate sector is made up of 31 REITs and one real-estate development company: CBRE Group

CBRE, +0.15%.

Here’s the entire list, sorted by dividend yield, along with trailing FFO yields.

Company Ticker Dividend yield FFO Yield ‘Headroom’ Total return – 12 months though Oct. 22
Macerich Co.

MAC, -3.25%

10.26% 12.86% 2.60% -37%
Iron Mountain Inc.

IRM, -0.35%

7.19% 6.27% -0.92% 15%
Simon Property Group Inc.

SPG, -0.16%

5.31% 7.97% 2.66% -6%
Kimco Realty Corp.

KIM, -0.47%

5.24% 6.69% 1.45% 53%
Host Hotels & Resorts Inc.

HST, -0.36%

4.77% 10.79% 6.02% -7%
Weyerhaeuser Co.

WY, -1.25%

4.67% 1.70% -2.97% 11%
Ventas Inc.

VTR, -0.97%

4.40% 5.43% 1.03% 39%
Vornado Realty Trust

VNO, -0.29%

4.15% 6.61% 2.47% -1%
SL Green Realty Corp.

SLG, +0.67%

4.13% 8.33% 4.20% -7%
HCP Inc.

HCP, -0.90%

3.94% 4.66% 0.72% 52%
Welltower Inc.

WELL, -0.31%

3.79% 4.48% 0.70% 52%
Realty Income Corp.

O, +0.68%

3.42% 3.96% 0.55% 44%
Crown Castle International Corp

CCI, +0.57%

3.40% 4.18% 0.78% 38%
Regency Centers Corp.

REG, -0.53%

3.36% 5.51% 2.15% 15%
Public Storage

PSA, +0.40%

3.33% 4.44% 1.11% 27%
Digital Realty Trust Inc.

DLR, -1.02%

3.20% 4.96% 1.75% 24%
Extra Space Storage Inc.

EXR, -0.11%

3.12% 4.12% 1.00% 39%
Federal Realty Investment Trust

FRT, -0.38%

2.99% 4.49% 1.50% 21%
Boston Properties Inc.

BXP, +1.07%

2.90% 5.14% 2.24% 17%
Apartment Investment and Management Co. Class A

AIV, -0.37%

2.84% 4.69% 1.85% 34%
Mid-America Apartment Communities Inc.

MAA, +0.15%

2.82% 4.55% 1.73% 45%
UDR Inc.

UDR, -0.14%

2.76% 4.08% 1.33% 33%
AvalonBay Communities Inc.

AVB, -0.58%

2.74% 4.13% 1.39% 32%
Equity Residential

EQR, -0.30%

2.57% 3.88% 1.31% 43%
Alexandria Real Estate Equities Inc.

ARE, +0.91%

2.55% 4.31% 1.77% 34%
Duke Realty Corp.

DRE, +0.79%

2.53% 4.08% 1.56% 28%
Essex Property Trust Inc.

ESS, -0.63%

2.36% 3.90% 1.54% 40%
Prologis Inc.

PLD, +0.24%

2.33% 3.60% 1.27% 48%
Equinix Inc.

EQIX, -0.58%

1.73% 3.85% 2.13% 41%
American Tower Corp.

AMT, -1.13%

1.59% 3.63% 2.04% 55%
SBA Communications Corp. Class A

SBAC, -0.57%

0.60% 3.30% 2.69% 60%
CBRE Group Inc. Class A

CBRE, +0.15%

0.00% 3.81% 3.81% 32%
Source: FactSet

You can click on the tickers for more about each company, including its business profile.

FFO stands for funds from operations, which is a non-GAAP measure used by REITs to gauge dividend-paying ability. FFO adds depreciation and amortization back to earnings, while subtracting any gains on the sale of investments. We can calculate the FFO yield by dividing the past 12 months’ FFO by the current share price. If the FFO yield exceeds the dividend yield, it appears there is “headroom” to raise the dividend, or at least maintain the current payout. If the FFO yield is lower than the dividend yield, you had better find out why — is this a temporary decline for a specific reason?

For a few of the companies, FFO figures weren’t available, so we used trailing free cash flow yields instead. A company’s free cash flow is its remaining cash flow after planned capital expenditures. Free cash flow yield figures appear in the FFO yield column for CBRE Group and Weyerhaeuser

WY, -1.25%.

Income-seeking investors may be excited by some of the high yields at the top of the list. But beware — some of the highest-yielding REITs are also some of the worst-performing, at least recently. This is why, before considering an individual REIT investment, you need to do your own research to understand a company’s specialty, that particular industry and think about whether the company’s long-term strategy seems reasonable.

Analysts’ ratings

Here’s the list again, in the same order, with a summary of sell-side analysts’ opinions:

Company Ticker Share ‘buy’ ratings Share ‘hold’ ratings Share ‘sell’ ratings Closing price – Oct. 22 Consensus price target Implied 12-month upside potential
Macerich Co.

MAC, -3.25%

17% 72% 11% $29.23 $35.15 20%
Iron Mountain Inc.

IRM, -0.35%

46% 36% 18% $33.97 $35.27 4%
Simon Property Group Inc.

SPG, -0.16%

67% 33% 0% $154.51 $178.68 16%
Kimco Realty Corp.

KIM, -0.47%

17% 66% 17% $21.39 $19.16 -10%
Host Hotels & Resorts Inc.

HST, -0.36%

41% 36% 23% $16.78 $18.73 12%
Weyerhaeuser Co.

WY, -1.25%

77% 15% 8% $29.13 $30.50 5%
Ventas Inc.

VTR, -0.97%

17% 74% 9% $71.99 $71.37 -1%
Vornado Realty Trust

VNO, -0.29%

36% 57% 7% $63.65 $70.25 10%
SL Green Realty Corp.

SLG, +0.67%

44% 45% 11% $82.31 $93.06 13%
HCP Inc.

HCP, -0.90%

52% 43% 5% $37.52 $36.01 -4%
Welltower Inc.

WELL, -0.31%

33% 62% 5% $91.92 $89.79 -2%
Realty Income Corp.

O, +0.68%

29% 62% 9% $79.72 $78.76 -1%
Crown Castle International Corp

CCI, +0.57%

41% 47% 12% $141.30 $142.85 1%
Regency Centers Corp.

REG, -0.53%

74% 26% 0% $69.65 $71.94 3%
Public Storage

PSA, +0.40%

14% 57% 29% $240.54 $247.00 3%
Digital Realty Trust Inc.

DLR, -1.02%

46% 50% 4% $134.81 $128.86 -4%
Extra Space Storage Inc.

EXR, -0.11%

25% 50% 25% $115.22 $117.10 2%
Federal Realty Investment Trust

FRT, -0.38%

72% 28% 0% $140.46 $141.88 1%
Boston Properties Inc.

BXP, +1.07%

57% 43% 0% $130.84 $144.15 10%
Apartment Investment and Management Co. Class A

AIV, -0.37%

35% 53% 12% $54.85 $54.21 -1%
Mid-America Apartment Communities Inc.

MAA, +0.15%

47% 47% 6% $136.38 $130.29 -4%
UDR Inc.

UDR, -0.14%

32% 64% 4% $49.71 $49.42 -1%
AvalonBay Communities Inc.

AVB, -0.58%

35% 65% 0% $221.83 $222.40 0%
Equity Residential

EQR, -0.30%

13% 74% 13% $88.44 $83.58 -5%
Alexandria Real Estate Equities Inc.

ARE, +0.91%

60% 40% 0% $157.14 $157.73 0%
Duke Realty Corp.

DRE, +0.79%

69% 31% 0% $34.05 $35.53 4%
Essex Property Trust Inc.

ESS, -0.63%

44% 52% 4% $330.99 $325.86 -2%
Prologis Inc.

PLD, +0.24%

74% 26% 0% $90.81 $91.97 1%
Equinix Inc.

EQIX, -0.58%

88% 8% 4% $569.93 $580.32 2%
American Tower Corp.

AMT, -1.13%

33% 61% 6% $226.74 $225.71 0%
SBA Communications Corp. Class A

SBAC, -0.57%

31% 63% 6% $244.98 $254.00 4%
CBRE Group Inc. Class A

CBRE, +0.15%

44% 56% 0% $51.71 $59.50 15%
Source: FactSet
REIT ETFs

For investors who want broad exposure to U.S. REITs, there are many exchange traded funds available. It’s important to keep in mind that the distribution yields include capital-gains distributed as part of the ETFs’ dividends. If you consider an ETF, read carefully about the nature of the dividend distributions and consider tax consequences. Here are six REIT ETFs as examples:

• The SPDR Real Estate Select Sector ETF

XLRE, -0.37%

 holds the 32 stocks in the S&P 500 real-estate sector and has a distribution yield of 2.85%, net of annual expenses of 0.13% of assets. The portfolio totals $4.1 billion.

• The SPDR Dow Jones REIT ETF

RWR, +0.00%

has $2.7 billion in assets and tracks the Dow Jones U.S. Select REIT Index. The ETF holds 95 stocks. Its distribution yield is 3.19% and the annual expense ratio is 0.25%. 

• The Schwab U.S. REIT ETF

SCHH, +0.08%

 has $6.1 billion in assets and also tracks the Dow Jones U.S. Select REIT Index. It has a distribution yield of 2.67% and a 0.07% expense ratio.

• The iShares U.S. Real Estate ETF

IYR, -0.13%

has $4.83 billion in assets and tracks the Dow Jones U.S. Real Estate Index, holding 115 stocks. The distribution yield is 2.56% and the expense ratio is 0.42%.

• The iShares Cohen & Steers REIT ETF

ICF, -0.14%

 is concentrated, holding the largest 30 U.S. REITs. The portfolio has $2.4 billion, the dividend yield is 2.32% and the expense ratio is 0.34%.

• The Vanguard Real Estate ETF

VNQ, -0.25%

 is huge, with $47 billion in assets as it tracks the MSCI U.S. IMI Real Estate 25/50 Index by holding 183 stocks. According to FactSet: “The only place it deviates is the persistent sector bias away from specialized REITs in favor of commercial REITs.” Vanguard quotes a distribution yield of 2.95% as of Sept. 30. The expense ratio is 0.12%.

Don’t miss: How to identify U.S. stocks with attractive growth potential

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2019-10-25