• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Real Estate

REITs Remain Investment Vehicles

If you own them for income, keep them. 
By ROGER ARNOLD Sep 17, 2014 | 05:00 PM EDT
Stocks quotes in this article: NLY, PMT, CIM, AGNC, CYS, CMO

It's only been a month since I last reviewed the type of real estate investment trusts (REITs) that invest in agency mortgage backed securities. However, in the past week or so, a few issues have come up that are putting downward pressure on the REITs.

In the last five trading days, the 10-year Treasury yield has risen and the REITs have all, in traditional fashion, declined in price. Annaly Capital Management (NLY), PennyMac Mortgage Investment Trust (PMT), Chimera Investment (CIM), American Capital Agency (AGNC), CYS Investments (CYS) and Capstead Mortgage (CMO) are all down between about 1% and 2.5%.

That's a perfectly logical move and it doesn't relate to the strength of their businesses. It's simply a standard reaction to increasing Treasury yields, which implies rising purchase money mortgage rates, and that the resale values of the mortgages within the securities the REITs hold would sell for less if they were to do so. It is not a cash flow issue for the REITs, however, so it does not indicate that dividends will be reduced.

However, bond traders and those in markets whose value is tied to or derived from bond yields are increasingly nervous about the near-term trajectory for yields and the implication for assets correlated to them.

On Sept. 6, famous and successful bond trader, David Tepper, stated publicly "It's the beginning of the end of the bond market rally. We are done."

This is a huge call since the bond market rally has been ongoing for 32 years and many others throughout that period have erroneously made the same call.

Three days later, another bond market expert, Jeff Gundlach, stated that the 10 year yield is range bound between 2.2% and 2.8% for the rest of this year. When he said that the 10 year yield was right in the middle of that range at 2.5%.  

Given the nervousness concerning the Fed's rate normalization trajectory though, the markets were, and are, more focused on the upper end of that range. That nervousness is exacerbated by the bond yield pop that occurred during the latter half of 2013 when yields rose at the fastest rate in history. They moved from 1.66% on May 1, to 3.04% on Dec. 31.

That move also caused mortgage rates to rise at the fastest rate in history and caused the prices of REITs to decline -- some of them dramatically.

Between May 1 and Dec. 31 of 2013, Annaly's price dropped by 37%, American Capital's by 41%, and CYS Investments' by 39%.

That was a big enough move to shake out many investors. Right now, it's important to note that this "weak money" never returned to that sector. Therefore, it is not there to supply the irrational selling necessary to cause a replay of last year's selloff -- even if the 10 year yield continues to move higher and approaches the 3% level again.

Further, as strong as the price performance of the REITs has been this year, they are still priced very near the lows that were put in last year. That's exactly what income investors should want.

The REITs are investment vehicles. The underlying value of the assets that produce that income will fluctuate with bond yields and mortgage rates. However, that is separate from the ability of the REITs being able to continue to pay our their high dividends. That income stream is not impacted by the near-term moves in Treasury yields and should be disregarded as a determining factor with respect to the future income potential of the REITs.

The bottom line is that if you own REITs for income, keep them. If they go on sale and you have capital available, buy more. If you don't have any more capital to invest for income don't worry about it. The dividend streams will be little impacted by moves in the prices of the REITs.

If you own the REITs for growth, you never should have been in that sector to begin with.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Arnold had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Real Estate

More from Real Estate

Kass: Untapped Homeowners Equity and Imbedded Gains Will Be a Ballast to Growth

Doug Kass
Jun 29, 2022 3:00 PM EDT

Homeowners equity has more than tripled in the last decade.

Global REIT American Tower Is Poised for a Rally

Bruce Kamich
Jun 21, 2022 10:13 AM EDT

Here's what traders could do.

Dozens of Stocks Suspended in Hong Kong Due to Problems in Accounts

Alex Frew McMillan
Apr 1, 2022 9:00 AM EDT

After missing yesterday's deadline day for filing full-year 2021 figures, many Hong Kong-listed, China-focused companies saw their shares stop trade.

Chinese Property Stocks Leap But Red Flags Abound

Alex Frew McMillan
Mar 30, 2022 9:48 AM EDT

There's a mounting list of Chinese developers that say they can't file their 2021 annual accounts in time, a likely sign of deeper trouble.

Buyer Beware on China Stocks

Kevin Curran
Mar 23, 2022 3:45 PM EDT

Intrigued by the wild swings in many of these stocks? Caution is warranted.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 07:59 PM EDT PAUL PRICE

    Very good quarterly numbers from Bassett Furniture (BSET)

    Bassett Furniture (BSET) blew right through analys...
  • 04:41 PM EDT PAUL PRICE

    First Half Results - Putrid Second Half Results - Likely to Be Much Better

    It's great that we're done with June. 2022 marked...
  • 04:51 PM EDT PAUL PRICE

    We Should Be in for Better Starting Soon

    Window dressing Thursday, the last day of the...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login