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4.66% Yielding REITs Are Cheap, Cheap, Cheap

Published Tue, 20 Feb 2018 06:00:00 -0500 on Seeking Alpha

REITs are cheap.

The Vanguard Real Estate ETF (VNQ) is on sale. If investors genuinely believe that the market capitalizations for the tech giants are reasonable, they cannot also suggest that REITs are anything but cheap. If Apple (AAPL), Google (GOOG), Microsoft (MSFT), and Amazon (AMZN) are going to enjoy the dramatic growth in revenues that is priced into their shares, we must not be heading into a recession.
That seems like a reasonable premise, doesn’t it?
The market is hitting new all-time highs month after month. It would be ironic for an analyst to suggest we were headed directly into a recession.
If we are not going into a recession, then VNQ is very attractively priced. The retail space is facing a few challenges, but revenues and same property NOI are still positive for most of the large REITs. If we see inflation pick up, it could push bond yields higher. An increase in bond yields would suggest an increase in REIT yields (lower prices equals higher yields). Investors use that premise to avoid buying anything that is a REIT in a rising rate environment. While higher yields do create a headwind for REITs, higher inflation would mean higher rental rates.
A future with high inflation, but declining rental rates, is an absurd premise.
VNQ holdings Company
Portfolio weight
Vanguard Real Estate II Index
Simon Property Group
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Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
HEALTH CARE REIT 52.22   41.1 1.27 3.48 6.40
SIMON PROPERTY GROUP 155.27   20.8 7.48 8.40 5.21
VENTAS 71.17   51.6 1.38 3.17 4.41
DIGITAL REALTY 126.53   116.1 1.09 4.32 3.38
PUBLIC STORAGE 249.58   29.8 8.38 8.00 3.20
BOSTON PROPERTIES 133.43   39.0 3.42 3.80 2.90
AVALONBAY COMMUNITIES 209.53   31.6 6.62 6.08 2.89
EQUITY RESIDENTIAL 85.36   42.7 2.00 2.27 2.69
PROLOGIS 84.04   31.2 2.69 2.12 2.55
MICROSOFT 137.52   27.1 5.07 1.84 1.35