Recent interest movement in Treasuries has narrowed their yield spread with real estate investment trusts, making some companies in the sector of publicly traded property and mortgage investment firms less attractive buys, according to Credit Suisse.
Analysts said a key support of the REIT industry's 20% run this year has been the coupon that the REIT sector could provide in this year's yield-starved environment. But Treasury yields are up 50 basis points since Dec. 1 and REIT funds from operation yield spreads are at their tightest level of 2010, 161 bps above the corporate bond index.
"As a result, we believe REITs are no longer compelling yield plays, and will need to be growth stories to attract investor interest," the analysts wrote.
Credit Suisse downgraded the self-storage REIT Public Storage to "Neutral" from "Outperform," in part due to Public Storage's balance sheet. While one of the strongest in the REIT sector, Credit Suisse said Public Storage's low leverage leads to less earnings sensitivity to topline growth and fewer opportunities to refinance existing debt at lower costs.
The analysts said the current conditions might bode well for other REITs that can generate additional profits by refinancing debt at a lower cost, specifically shopping mall REIT Simon Property Group—which Credit Suisse projects could issue seven- to ten-year debt to refinance 5.97% debt to inside a total cost of 5%.
