U.S. REIT Shares ‘Cheap’ as Stock Slump Creates Discount Buying

U.S. real estate investment trusts are trading at the biggest discount to the underlying value of their properties in more than two years, signaling it may be a good time for investors to buy shares in the companies.

REITs traded at about a 12 percent discount to net asset value as of Oct. 5, the largest since early 2009, according to Jim Sullivan, a managing director at Green Street Advisors in Newport Beach, California. Net asset value is an estimate of the fair market price of the real estate owned, minus liabilities. When the discount reaches at least 10 percent, REITs generally offer better returns over a two-year period than a portfolio of equal parts equities and corporate bonds, he said.

The 129-member Bloomberg REIT index has dropped 21 percent from the year’s high point on July 22, compared with a 14 percent loss for the Standard & Poor’s 500 Index. Stocks have declined amid concern that Europe’s debt crisis will worsen and the U.S. may slip into another recession.

“It’s a great time to step in,” Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio, said in a telephone interview. “If you want to buy stocks that are cheap and they’re quality names, quality companies, then there’s a whole bunch of those in the REIT space.”

REITs are yielding more than some other investments and the property income that supports their dividends is solid, according to Moore. The dividend yield for the Bloomberg REIT Index is 4.1 percent, compared with the 10-year Treasury yield of about 2.1 percent.

Office Rents

U.S. office rents climbed in the third quarter as leasing extended a rebound following almost three years of declines, Reis Inc. said Oct. 5. The average effective rent, or what tenants paid after any landlord concessions, rose to $22.39 per square foot, the highest since 2009’s fourth quarter, the New York-based real estate research company said. Office space is the largest part of the commercial real estate market.

U.S. commercial property values were unchanged in September from the previous month, according to a Green Street index. While values are still 9 percent below their August 2007 peak, they’ve gained 48 from the bottom reached two years ago.

REITs should do well even in a slow-growing economy because the companies own high-quality real estate in good locations, and a lack of new supply should help boost occupancy rates, Moore said.

U.S. employers added 103,000 workers in September after a 57,000 gain in August, Labor Department data showed today. The pace of job growth was still too slow to reduce the unemployment rate, which held at held at 9.1 percent. The economy expanded at a 1.3 percent pace in the second quarter following a 0.4 percent gain in the previous three months, the weakest performance in two years, the Commerce Department said last week.

The 26 office and industrial REITs followed by Stifel Nicolaus & Co. are trading at 20 percent to 30 percent below the firm’s net asset value estimate, analysts led by John Guinee wrote in a report today. Stifel Nicolaus rates eight of the companies “buy,” 17 “hold,” and one “sell.”

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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