U.S. real estate investment trusts plunged, capping the worst two-day decline since October 2011, as investors sold shares of the companies vulnerable to rising interest rates.
The Bloomberg REIT Index fell 4.2 percent, extending a 3 percent slump yesterday, to close at the lowest level since December. Single-tenant real estate landlords, which are viewed as bond-like investments because of their long-term leases, led today’s decline with a 5.5 percent slump.
“This sector is going to woefully underperform in a rising rate environment,” Jonathan Pong, an analyst at Robert W. Baird & Co. in New York, said in a telephone interview. “History proves that out.”
Single-tenant, or triple net-lease, properties typically have long-term leases of 15 to 20 years. The companies are viewed as comparable to bonds because of the duration of the leases and the steady and reliable cash flow the rent payments provide. Health-care REITs, which also typically have long-term leases, fell the second-most among the industry, with the Bloomberg Healthcare REIT Index dropping 5.3 percent.
REITs, which pay out most of their earnings as dividends, have more than doubled since 2009 as low interest rates fueled demand for higher-yielding investments. The 129-member Bloomberg REIT Index has tumbled 16 percent since May 21 as the yield on the 10-year Treasury note began to climb.
REITs are dependent on the capital markets to finance acquisitions and development since they they pay out most of their taxable earnings to shareholders. The largest cash cost is typically interest expense, said Craig Guttenplan, a REIT analyst at CreditSights Inc., a New York-based fixed-income research company. The firm downgraded REIT industry debt to market perform from outperform, according to a report yesterday.
“Their relative value is gone,” Guttenplan said in a telephone interview. “There’s really not much more room to run for the REIT sector.”
Ventas Inc. (VTR:US), the largest U.S. health-care REIT, sank 6.1 percent to $64.38. Boston Properties Inc. (BXP:US), the biggest office REIT, slumped 6.5 percent to $100.58. Simon Property Group Inc. (SPG:US), the No. 1 U.S. mall owner and biggest REIT, decreased 4.9 percent to $154.58.
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