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Are REIT Returns Correlated With Tenant Performance?

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Here's a question that I've always wondered about: how closely is a REIT's performance tied to the performance of its tenants' sector? For example, if the retail industry goes south, how badly will that hurt retail REITs? I've always assumed that because retail REITs rely so little on percentage rent that if retail sales dipped, they wouldn't get hurt badly unless it caused retailers to actually close stores. But what about when you get to stock prices? Do retail real estate stocks move up and down in lockstep with retailer stocks?

It turns out the answer to that question is yes.

This premise--the correlation between tenant stocks and REIT stocks--is the subject of new Bank of America research. Nicholas Yulico at TheStreet runs down the results.

New research from Bank of America shows that the stocks of office real estate investment trusts are generally correlated to the stocks of financial-related companies, which tend to make up a good portion of their tenant bases.

In addition, retail REITs, which own malls and shopping centers, are well correlated to retailer stocks, according to the report from analyst Christy McElroy.

Over a three-year and five-year period, the correlation between office REITs and the S&P IBK/Brokerage and Financial indices is around 0.95.

In measuring correlation, a reading of 1.0 suggests the two sectors' stock prices move in the same direction at all times. Thus, the 0.95 reading means that office REITs and financial stocks are nearly always moving in lockstep fashion.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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