Real estate investment trusts are unlikely to increase their net operating income this year through internal growth, but Raymond James analyst Mandy Samols says the sector still should have an average total return of 10% to 15% in 2010.
“Historically REITs have performed well heading out of a recession,” said Ms. Samols, forecasting average yields of 7% with the rest of the return coming from capital appreciation.
The analyst expects REITs to rise as capitalization rates continue to fall and external acqusitions drive growth. She also expects demand for yield products will help the sector.
“REITs should trade at premium to net asset value in 2010,” said Ms. Samols, adding the sector is now trading at an 8% premium to NAV.
Historically REITs have traded as much 30% above or 40% below NAV. Other positives for the sector include the fact spreads between REIT yield and Bank of Canada rates remain “above the historical average and at levels last seen at the beginning of the last REIT fundamental cycle.”
The REIT sector will also get a boost from new federal laws taxing income trusts but exempting REITS. It comes into effect at the end of this year. She does say that an “extraordinary” increase in interest rates or a “double-dip recession” would negate some of what she has predicted.