Donald Trump’s election has set off an unprecedented rally in both stocks and bond yields. Trump’s promises of introducing strong fiscal stimulus measures have pushed yields higher since Nov 8. Given such expectations as well as an imminent rate hike, rate dependent sectors such as REITs have suffered losses.
However, losses for the category have been relatively limited considering the surge in bond yields. There is sufficient reason to believe that both property prices and rent income will rise in the near future, also as a result of Trump’s policies. Investing in carefully selected REIT stocks may be a prudent option for investors after all.
Limited Losses for REITs
Since Trump’s victory was announced on Nov 8, the yield on 10-year U.S. Treasury notes has increased from 1.88% to nearly 2.40%. This in turn has led mortgage and other market rates even higher. However, the S&P 500 REIT industry group has lost only 3% during the same period, defying the expectations of most market watchers and analysts.
One estimate had put the consequent decline in REIT prices at 10%.
However, the inherent strength in REIT stocks is indicative of the fact that investors expect the sector to benefit from a Trump presidency. A relatively softer fall for the category implies that growth prospects are bright and credit spreads are likely to narrow in the near future.
Is a Resurgence in REITs Plausible?
The reason behind the rise in bond yields is the belief that Trump will push through strong fiscal measures. To be more specific, the new administration is expected to reduce taxes and boost spending on infrastructure. This in turn will result in higher growth, an increase in interest rates and consequently, higher inflation. These factors are expected to push up bond yields.
However, higher growth and inflation will also lead to a rise in real estate prices and rents which will beneficial for REITs. Additionally, Trump has promised to ease regulations on financial services which will lead to looser credit standards for those seeking mortgage loans. This will push up the demand for homes, leading to higher home prices.
A hike in prices of real estate and looser credit requirements will also lead to a fall in credit spreads. The consequently higher borrowing and purchasing activity are likely to push property prices still higher. Such a combination of factors is likely to mitigate the effect of rising interest rates to a large extent. Ultimately when yields start to ease, a spectacular rally for REITs could be in the offing.
REITs seem embattled as of now but their fall has been a soft one considering the surge in bond yields. Trump’s forthcoming fiscal measures are likely to help the sector substantially, leading to a recovery for the category.
This is why it makes good sense to add REIT stocks with favorable metrics to your portfolios. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.
However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Bluerock Residential Growth REIT Inc (BRG) acquires apartment properties in demographically attractive growth markets throughout the U.S.
Bluerock Residential Growth REIT has a VGM Score of B. Its earnings estimate for the current year has improved by 74.1% over the last 30 days. It has a dividend yield of 9.3%. The stock has returned 7.5%year-to-date, outperforming the Zacks REIT Residential sector, which has lost 9.4% over the same period. The stock has a Zacks Rank #1 (Strong Buy).
Preferred Apartment Communities Inc. (APTS) acquires and operate multifamily properties primarily in the U.S.
Preferred Apartment Communities has a Zacks Rank #2 (Buy) and a VGM Score of A. It has expected earnings growth of 12.1% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 10.37, lower than the industry average of 18.19. It has a dividend yield of 6%. The stock has returned 4.3% year-to-date, outperforming the Zacks REIT Residential sector, which has lost 9.4% over the same period.
Cherry Hill Mortgage Investment Corp (CHMI) is a residential real estate finance company that acquires, invests in and manages residential mortgage assets in the U.S.
Cherry Hill Mortgage Investment has a Zacks Rank #2 and a VGM Score of A. It has expected earnings growth of 7.2% for the current year. Its earnings estimate for the current year has improved by 4.8% over the last 30 days. It has a dividend yield of 10.8%. The stock has returned 41.5%year-to-date, outperforming the Zacks REIT Mortgage sector, which has lost 10.6% over the same period.
Gaming and Leisure Properties Inc (GLPI) is primarily engaged in owning, acquiring, developing, expanding, managing, and leasing gaming and related facilities.
Gaming and Leisure Properties has a Zacks Rank #2 and a VGM Score of B. It has expected earnings growth of 5.5% for the current year. Its earnings estimate for the current year has improved by 0.6% over the last 30 days. It has a dividend yield of 7.9%. The stock has returned 10.4%year-to-date, outperforming the Zacks REIT Other sector, which has lost 0.9% over the same period.
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