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Monday, January 30, 2012 1:00 PM ET
US equity REITs outperform banks, broader market despite turbulent economy
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About This Feature
Data feature produced by S&P Global Market Intelligence research groups in cooperation with the news department to highlight emerging trends and topics of interest.

Despite conventional wisdom about the weakness of real estate amid the financial downturn, equity REIT stocks are showing strength even in the toughest of times. More than three years since the downturn, SNL-covered U.S. equity REITs are outperforming SNL-covered U.S. banks in terms of price appreciation, total return and dividend yields.

In fact, REITs have outperformed banks in terms of total return and price change since 2004, with the exception of a few months in 2009 when banks overtook REITs.

Analyzing the past three fiscal years, the SNL U.S. REIT Equity Index posted a 58.35% price change increase between January 2008 and December 2011, while the SNL U.S. Bank Index experienced a price change of negative 17.52% and the S&P 500 appreciated 39.23%.

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And despite years of outperformance, many industry observers continue to see strength in REIT stocks going into 2012. In a Jan. 12 research report, analysts at J.P. Morgan Securities put forth an expectation that REIT stocks will deliver a 10% to 12% total return in 2012, noting that "risk-adjusted return prospects still look good heading into this year." The team estimates that "core growth should be positive across the board," adding that continued low interest rates will help support real estate valuations. Given these twin expectations, the team forecasts "another year of good earnings growth and dividend growth" for REITs.

Due to the requirement that REITs must pay at least 90% of taxable income in dividends, it should be no surprise after seeing the difference in price appreciation between REITs and banks that the total return gap between the two industries grew over the last three fiscal years. For this period, the SNL U.S. REIT Equity Index displayed a total return of 79.94%, compared to the S&P 500's total return of 48.59% and the SNL U.S. Bank Index's negative 14.12% total return.

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However, despite a strong performance in the last few years, some industry observers are less bullish on REIT stocks. Goldman Sachs analysts titled their 2012 U.S. REIT outlook, released Jan. 12, "A tough act to follow" because some of the positive factors that helped the sector in 2011 "should diminish in the near term," causing REIT stocks to underperform. According to the report, these factors include fundamentals, the direction of fund flows and the level and cost of debt funding.

"The bottom line is CRE fundamentals lag the economy and near-term growth should slow from the pace of the prior year, limiting cash flow growth," the analysts added. The team expects a zero to negative 5% total return in 2012.

Looking at dividend yields, this is one area where banks have recorded more growth than REITs over the past year. REITs continued to show steady yields hovering in the 3% to 4% range in 2011, whereas banks showed significant growth, with the sector increasing its dividend yield 164.29% to 1.85% on Dec. 30, 2011, from 0.70% on Dec. 31, 2010.

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To compare total return for specific REITs and related indexes, use the REIT Total Return Template found in the Template Library.

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