Philip van Doorn

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Sept. 6, 2016, 4:43 p.m. EDT

REITs, boasting big outperformance, have earned their own sector

Real estate investment trusts now will stand on their own, apart from financial companies, in the S&P 500 Index

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By Philip van Doorn, MarketWatch


Alexandria Real Estate Equities, Inc.
An artist's rendering of the new 50 Binney Street, which is part of Alexandria Center at Kendall Square, Cambridge, Mass., owned by Alexandria Real Estate Equities.

Real estate investment trusts (REITs) have been lumped in with the financial sector, which hasn’t necessarily been a good thing, considering banks’ lower profits and tighter regulation since the financial meltdown in 2008.

But that’s changing Thursday, when S&P Dow Jones Indices adds an 11th sector for the group, the first adjustment since 1999.

The change has been in the works for some time, with S&P Dow Jones Indices making the initial announcement in November 2014 that its global industry classification standard (GICS) would include the new real estate sector. In March, David Blitzer, the managing director and chairman of the Index Committee at S&P Dow Jones Indices, said the change was being made to recognize “the growing importance of real estate in the world’s equity markets.”

The new sector will include equity REITs. Mortgage REITs will have their own subindustry group within the financial sector.

An equity REIT is a company that owns real estate for development or long-term investment, and is required to pay out at least 90% of its taxable income through dividends to shareholders. A mortgage REIT originates real estate loans or invests in mortgage-backed securities.

There have traditionally been 10 sectors for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.06% , S&P 400 Mid Cap /zigman2/quotes/210599897/delayed MID -0.35% and S&P Small Cap 600 /zigman2/quotes/210599868/delayed SML -0.76% indices. The S&P 500 financial sector previously included 92 companies, with 25 banks making up 46% of the sector’s market capitalization. There are 27 REITs in the S&P 500, all of which are equity REITs.

Jefferies analysts Steven DeSanctis and Omotayo Okusanya in May predicted the REIT sector would outperform because of buying pressure on mutual fund managers who were “substantially underweight the sector.”

However, Laszlo Birinyi, a prominent real estate investor, said this week that the new REIT sector would help the securities industry but confuse investors. Carving out a separate sector may also prompt some mutual funds or ETFs that focus on the financial sector to sell some of their REITs, which could affect shareholders of the funds who are looking for income.

Still, investors may not be so easily confused. Equity REITs are nothing like banks, and have many advantages in the post-crisis, hyper-regulated environment.

Splitting the equity REITs from the financial sector and into their own sector “makes a lot of sense,” said Joel Marcus, founder and CEO of Alexandria Real Estate Equities Inc. /zigman2/quotes/206543290/composite ARE +1.17% .

In an interview Aug. 29, Marcus emphasized the stability of REITs, as compared to the banking industry, which “doesn’t hold hard assets” the way equity REITs do.

He also said the banking sector “is a far cry” from what it was before the bankruptcy of Lehman Brothers in 2008, which helped lead to much greater capital requirements, a tightening of credit standards and a clampdown on certain types of commercial lending.

Alexandria Real Estate Equities was founded in 1994 and focuses on developing and owning major “urban campus” facilities for the life-sciences industry. The company’s stock is included in the S&P Mid Cap 600 Index and has a market value of $8.6 billion. The shares have a dividend yield of 2.90%.

Marcus said the company is in a sweet spot, developing properties in “great locations” because of the ability of large R&D-oriented corporate tenants “to attract great talent.”

Michael Binger of Gradient Investments included Alexandria Real Estate Equities among a group of six of his favorite dividend stocks he shared during an interview in May.

/zigman2/quotes/210599714/realtime
US : S&P US
3,090.07
-1.77 -0.06%
Volume: 1.02B
Nov. 13, 2019 2:37p
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/zigman2/quotes/210599897/delayed
US : S&P US
1,984.09
-6.90 -0.35%
Volume: 367.28M
Nov. 13, 2019 2:27p
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/zigman2/quotes/210599868/delayed
US : S&P US
978.00
-7.47 -0.76%
Volume: 278.68M
Nov. 13, 2019 2:27p
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/zigman2/quotes/206543290/composite
US : U.S.: NYSE
$ 156.54
+1.81 +1.17%
Volume: 199,246
Nov. 13, 2019 2:37p
P/E Ratio
148.53
Dividend Yield
2.55%
Market Cap
$17.86 billion
Rev. per Employee
$3.72M
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