Lampert’s Record Stock Surge Shows REITs Belong in Big Leagues

They must’ve had a great Realtor.

Real estate stocks will be moving out of the cramped quarters they shared with banks, insurance companies and other financial firms into their own digs in the so-called Global Industry Classification Standard system that groups companies according to their lines of business.

The overlords of many of the world’s benchmark stock indexes, S&P Dow Jones Indices and MSCI Inc., announced the change this week after an annual review of the GICS structure. The move will increase the number of industries from an even 10 to an odd 11, so it’s safe to say the change wasn’t taken lightly. (It’s also probably safe to assume that it wasn’t done without several “these GICS go to 11” jokes referencing the movie “Spinal Tap.")

While it’s easy to dismiss the move as mere digital paper shuffling, it could potentially have a big impact on the way investors research and allocate stock holdings. And it highlights how rapidly the industry has grown within the public stock market in recent years, aided by low interest rates and tax laws that require real estate investment trusts to pay shareholders almost all of their profit in dividends.

Prisons, Billboards

Take a look at what happened to Sears Holding Corp. last week for Exhibit A of why REITs have become so popular. The shares surged 31 percent, the most ever under Chief Executive Officer Eddie Lampert, after Sears announced plans to sell 200 to 300 stores to a spinoff REIT. Windstream Holdings Inc. rallied 12 percent, the most in six years, in July when it announced plans to spin off its fiber and copper networks into a REIT.

From prison yards to billboards to shelf space in storage warehouses, companies are getting creative in what they define as ‘‘real estate’’ in an effort to win Internal Revenue Service approval for REITs.

As a result, the growth in public real estate companies has been remarkable. In the Standard & Poor’s 500 Index, for example, there currently are 22 real-estate companies that make up about 2.4 percent of the index, compared with less than 0.5 percent in 2004.

As you make your way down into indexes of smaller companies, they are even more prominent. Real estate stocks make up almost 10 percent of the S&P MidCap 400 Index, the second biggest among 24 sub-industries and almost twice the weighting of banks. They are about 8.2 percent of the S&P SmallCap 600 Index, the third-largest of two dozen groups.

S&P Dow Jones and MSCI don’t plan to add the 11th industry group to their indexes until the end of August 2016. A lot may change between then and now, most notably the low interest rates that have fueled the real estate industry and made the dividends of REITs so attractive. We’ll know by then if these amps really need to go to 11.

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