A Look at REITs

“Haven't heard much chatter about the health of REITs lately,” a reader writes. “Do you folks have any prognostications on the pros and cons of investing in some now?”

The 5: Look for the REITs to start issuing a boatload of new shares, says Dan Amoss, who follows the sector even more closely than hard-core football fans will follow the NFL draft tonight.

“REITs will have to divide up their shrinking rental cash flow among lots of new shareholders,” says Dan, “most of whom invested capital just to delever balance sheets. This capital staved off bankruptcies. It’s defensive capital; it won’t be deployed as growth capital.

“The flood of new REIT shares will act as strong resistance against further rallies in the REIT sector and has permanently diluted the sector’s per share earnings power.

Too, “there’s still a huge wall of ‘un-refinanceable’ commercial mortgage maturities over the next several years. These maturities will occur at a time when property values and rents will remain weak.

“Yet REIT investors aren’t expecting this type of chronic weakness; most REITs have priced in a typical cyclical rebound in rents. REITs are now almost as expensive as they were near the 2007 peak, and will only become cheaper if rents quickly return to their peak levels.” Agora Financial.