Real Estate The Real Deal?

1/31/2011


The Dow Jones U.S. Real Estate Index returned 26.9% in 2010, easily exceeding the S&P 500 Index's 15.1%. The real estate index — which includes 78 stocks, with about 94% of its stock-market value in real estate investment trusts (REITs) — outpaced the S&P 500 in eight of the last 10 years. During that period, the real estate index returned an annualized 9.7% versus a miserly 1.4% for the S&P 500.

Will real estate continue its winning ways? We can't say for sure. In 2009 and 2010, the sector surged in part because credit conditions improved. Most real estate firms need a steady supply of capital, and as credit markets rebounded and financing became available, many issued debt and equity at favorable rates.

Last year, real estate investment trusts (REITs) benefited from a rebound in profit growth (fueled partly by contributions from acquisitions), higher occupancies, and more stable rents. Apartment REITs were the strongest performers, reflecting sluggish home buying and tight supply. Retail REITs rallied on signs of a rebound in shopping centers, while hotel REITs rose on increased business spending.

A continuation of those trends, coupled with an improved economy, could help sustain growth and spark dividend hikes. Most REITs pay sizable dividends because of the rule that they must distribute at least 90% of taxable income. The average real estate stock in our Quadrix universe pays a handsome 4.6% dividend yield.

Recommendations

The Forecasts does not recommend real estate stocks for two main reasons:

• The stocks score poorly in Quadrix, with an average Overall score of only 30 for the 176 U.S. real estate names in our research universe, down from 41 a year ago. Only 23 of the stocks score above 50, while more than one-third fall in the bottom 20% of Quadrix. REITs, which account for 152 of the stocks, often carry quite a bit of debt and have middling sales and earnings growth rates — areas that hurt their Quadrix scores.

• Most real estate stocks are small-caps. Only 38 stocks have market values exceeding $3 billion (the Forecasts' typical cutoff for consideration) and only one of those earns an Overall score above 70 — Chimera Investments ($4; CIM), with a 77.

For many investors, a fund holding a basket of real estate stocks might be a better choice than individual stocks. The Vanguard REIT Index ($56; VNQ) exchange-traded fund (ETF) mimics the MSCI U.S. REIT Index. Yielding 3.4%, the fund charges an annual expense ratio of 0.13%.

U.S. REAL ESTATE STOCKS IN QUADRIX
 
--------------------------------- Averages ---------------------------------
----- Quadrix Scores -----
Sector (No. of Companies)
Market
Cap.
($Mil.)
Div.
Yield
(%)
12-Mo.
Return
(%)
Value
Overall
Real Estate Development (5)
223
0.0
14.1
26
11
Real Estate Management (4)
870
0.0
(8.3)
14
21
Real Estate Operations (10)
350
1.5
35.2
37
21
Real Estate Services (5)
2,278
0.1
16.6
24
29
REITs — Diversified (17)
1,677
4.1
29.6
42
26
REITs — Industrial (8)
2,213
3.8
33.9
40
22
REITs — Mortgage (31)
1,005
8.6
42.0
61
47
REITs — Office (20)
2,774
4.3
22.9
52
29
REITs — Residential (17)
3,185
4.0
49.8
31
25
REITs — Retail (26)
3,305
4.4
44.1
44
27
REITs — Specialized (33)
3,301
3.8
34.8
40
30
All U.S. Real Estate (176)
2,280
4.6
35.3
43
30

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