Barclays: REIT dividend yields attractive in low-rate environment
The low-rate environment will make real estate investment trust dividend yields appealing heading into 2013, keeping financing costs low.
The Federal Reserve December meeting provided further monetary accommodation by attempting to generate a stronger recovery and significantly improve conditions in the labor market. However, the Fed is having less of an impact on yields at the long end of the curve, U.S. REITs analyst Ross Smotrich of Barclays (BCS) said in an outlook report.
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Thus, two implications are noted for the REIT stocks broadly: refinancing upside and valuation ceiling.
Although, REITs have materially lower leverage than during the peak, near-term debt maturities are significant in 2013 for the majority of property types, producing earning gains from refinancing activity, even though much of it is already priced in.
"There appears to be continued opportunity to lower debt costs further as maturing debt is typically priced at higher rates than current market terms," Smotrich noted.
Given the recent round of open-ended quantitative easing, there was little impact on long-term interest rates. As a result, continued cap rate compression is unlikely going in to 2013.
However, this generally will apply to core, institutional quality real estate versus assets in secondary and tertiary markets.
"The spread between core real estate and secondary/tertiary markets is nearing peak levels and we think that if the economic picture does not deteriorate significantly then the spread between these assets should compress in 2013," Barclays said.
Given this outlook, stock performance for higher quality REITs will be driven by earning gains. The best growth are in the industrial, mall and apartment subsectors.
Thus, Essex Property Trust is poised to generate better-than-average same-store net operating income in 2013 and 2014 because of the company’s exposure to high barrier to entry markets on the West Coast.
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The expected NOI growth for the company is 6.7% in 2013, which is 100 basis points better than the sector average.
"We believe management’s transaction acumen and discipline will be key as investment dollars continue to seek opportunity in the space, keeping private market valuations near historically high levels," Smotrich noted.
REITs also took advantage with a spike in unsecured debt issuance of $21 billion for 2012, with Treasury yields decreasing for the first half of the year.
Additionally, the commercial mortgage backed securitization market posted a strong comeback as well on the new issuance side, up 47% to $53 billion in 2012.
"As such, it appears that demand for lower tier assets will still be an issue going forward, but as rates stay low there may not be a catalyst to change the status quo," Smotrich said.