The S&P U.S. Real Estate Investment Trust (REIT) index was down 7% year to date through September 22 -- hurt, according to S&P Capital IQ, by investor expectations that the Federal Reserve's pending increase in the Fed funds rate will negatively impact income-oriented securities. However, an increasing number of REITs have instituted share repurchase programs in 2015, according to SNL Financial.
A recent article titled "REITs, in droves, move to repurchase shares", by SNL's Jacob Wiggins and Tom Yeatts, noted that 28 REITs announced share repurchase plans year to date through September 15, with 17 of them occurring in just the third quarter. With the recent selloff in REIT shares, many companies are trading at notably high discounts to net asset value (NAV).
The median discount to NAV across the public equity REIT market with a repurchase plan was 17.37% at Sept. 15, according to SNL data. Among those trading at discounts of 20% or more to NAV were Brandywine Realty Trust (BDN), CBL & Associates (CBL) and General Growth Properties (GGP). All three of these are S&P Capital IQ buy recommendations.
According to S&P Capital IQ Equity Analyst Cathy Seifert, after rising 2% in 2014, GGP revenues will likely increase between 2% to 4% in 2015 and accelerate to 5% to 7% growth in 2016, primarily reflecting the impact of better rents and improved occupancy levels. Seifert thinks that a combination of earnings growth and portfolio pruning will help drive GGP shares higher. GGP has a 2.8% dividend yield.
Seifert also thinks leasing activity will begin to pick up in BDN's office markets with higher demand in Austin and Philadelphia markets in particular. For 2015, S&P Capital IQ sees total occupancy for Brandywine Realty reaching 92%, up from 91% in 2014. BDN has a 4.9% dividend yield.
As SNL notes, REITs are capital-intensive businesses, with expensive properties to buy and maintain, and those endeavors require substantial capital that otherwise might be used, on the fly, to repurchase stock during the down cycle. And many REITs, at midyear, have substantial development pipelines to finance.
However, stocks trading a discount to NAV can make attractive investment opportunities.
For investors who prefer exchange-traded funds (ETFs), due to the benefits of diversification, intraday market liquidity, and lower management fees relative to other diversified financial instruments, one option in the REIT space is First Trust REIT Index (FRI),one of 17 U.S. REIT focused ETFs. FRI, which tracks the aforementioned S&P US REIT index, sports a 2.7% dividend yield. BDN, CBL and GGP are three of its 153 holdings. The ETF ranks favorably to S&P Capital IQ for the low qualitative risk assessments of its holdings. It has a 0.50% expense ratio and trades with a relatively tight $0.04 bid/ask spread.
SNL Financial, like S&P Capital IQ, is owned by McGraw Hill Financial.
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