REITs Stumble But Still Have a Place in My Portfolio

 | Apr 18, 2018 | 12:00 PM EDT
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While markets have been have been experiencing a great deal of volatility so far in 2018, multiple up and down days have resulted in little in the way of gains. Through yesterday, the S&P 500, for instance, has experienced 29 days closing up or down at least 1%, an average of 2 days per week, yet for all of that movement, is still close to neutral, up just 1.2% for the year. The market can't make up its mind these days, and is taking investors on a wild ride in the process.

Conditions have been far worse with real estate investment trusts (REITs), typically higher yielding securities that have reacted negatively to rising interest rates. Year-to date, as measured by the FTSE Nareit All Equity REIT Index, the asset class is down 6.2% (on a total return basis), underperforming the S&P 500 by nearly 7.5%.

Yield-sensitive sectors, such as REITs, often stumble during periods of rising interest rates, economic growth and higher expected inflation. As interest rates rise, investors can take advantage of higher rates in safer securities such as Treasuries, rendering REITs less attractive. In addition, REIT dividends are generally taxed at a higher rate than equity dividends.

One of the few REIT sectors that is actually in positive territory for the year is timber land. Often considered to be an asset class by itself, the four timber REITs Rayonier (RYN) (current yield 2.74%), Weyerhaeuser (WY) (3.51%), PotlachDeltic (PCH) (3.04%), and CatchMark Timber (CTT) (4.31%) all have positive total returns year to date. While timberland REIT dividend yields are not as high as yields of other types of REITs, they have provided investors a way to get exposure not only to timber, a renewable and much needed resource, but also to land.

Weyerhaeuser, for instance, owns 11.5 million acres in 20 states, which is the equivalent of nearly 18,000 square miles. For perspective, 18,000 square miles is the size of Vermont and New Hampshire combined, or slightly less than the area New Jersey, Hawaii and Connecticut combined. The company's land holdings were greatly increased when it merged with Plum Creek Timber (a former holding of mine) in 2016.

My own REIT holdings, oddball as they are, have stumbled to varying degrees in 2018. Gas station/convenience store REIT Getty Realty (GTY) , (5% yield, -3.3% YTD) yesterday announced the purchase of an additional 30 convenience store and gas station properties for $52 million. We'll see if it can ultimately boost the current 32 cent dividend, which was raised 14% from 28 cents last fall.

Correction facility (prison) REIT CoreCivic (8.56% yield, -7% YTD) has continued to stumble after its meteoric recovery post 2016 election. Still a controversial holding, (CXW) has gotten cheap. It will continue to be prone to politics, and will be interesting to watch during the mid-term elections.

Farming REIT Farmland Partners (FPI) (6.33% yield, -6.3% YTD) has recovered somewhat since hitting the low $7 range. The company's merger with American Farmland, which closed last year, has improved the quality of land holdings, but some skepticism persists that the dividend is not sustainable.

For all three oddball REITs, I continue to reinvest dividends into additional shares, which theoretically increases my holdings in gas stations, prison cells, and farmland each quarter.

Individual REIT ownership is not for everyone, given the concentration risk. If you want broad-based, and cheap exposure to the sector, consider a REIT Fund or ETF, such as Vanguard Real Estate Index ( (VGSIX) , (VNQ) ).

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