US investors have invested heavily in smaller real estate investment trusts in the last quarter, which indicates that the improving economy is increasing their appetite for risk.
While the Dow Jones All REIT index returned 10.48% in Q1, which was down sharply from its 15% return in Q4 2011, smaller REITs have performed much better. In fact, the three best performing REITs in Q1 all have a market capitalisation of under $1 billion and were all among the worst performing stocks in 2011.
This is where the increased risk appetite is apparent; smaller REITs are considered a higher risk investment than their larger counterparts, because they usually have much larger debt levels and their tenancies tend to be much more sensitive to economic changes. As a result their stock prices are lower.
The Pennsylvania Real Estate Investment Trust was the best performing REIT in Q1 with a 48% share return, which is a complete turnaround on last year's 24% negative return.
The Philadelphia-based owner of 49 shopping malls, which has a market capitalisation of about $845 million, was actually dropped en masse by investors last year, on fears that it was over leveraged and that low sales volumes in its malls made it non-viable. However, changes in the economy in recent months have changed investors' outlook for the trust.
With "the economy picking up, credit markets reopening and retailers looking for space…investors are more willing to take a position" in the company, said Nathan Isbee, an analyst at Stifel Nicholas.
Another turnaround was Sabra Health Care REIT. The nursing home landlord, which has a market capitalisation of $610, went from a negative return of 29% last year, to a positive 38.8% in Q1 and increasing investor attention this year. This was also a drop-like-hot-coal stock last year on fears of the effects cuts to Medicare reimbursements would have, but it is now thought that the effects can be offset by cutting costs.
Timber REITs also brought home the bacon in Q1, with the top 3 timber REITs returning an average 8.65% and an 18% from the top performing Timber REIT Weyerhaeuser Co.
- Tuesday 10 April 2012