Realty Income Corp (O), Ventas, Inc. (VTR), Equity Residential (EQR): Wait! Before You Sell Your REITs

What could go wrong

Wall Street’s belief that the Fed tapering asset purchases is the first step to eventually unwinding its balance sheet has contributed to the rise in interest rates. The Federal Reserve now holds over $3.6 trillion on its balance sheet, compared to $880 billion at the start of 2008. When and if the Fed finally begins to sell treasuries, the selling pressure could lead to soaring interest rates, which could cripple REITs. But according to most economists, unwinding is well down the road.

Moreover, historically speaking, the 10-year Treasury rate would still have to rise nearly 2 percentage points to reach the 4.64% average since 1871, leaving plenty of room for rates to run.

The Foolish bottom line

The REIT industry has been crippled by rising interest rates over the past three months, but leading industry analysts see the 10-year Treasury stabilizing, and possibly declining through the rest of the year. Over the long term, the Fed has consistently insisted that it will remain accommodative, and the unwinding of its massive balance sheet is probably years away. By the time interest rates do begin to rise, economic growth will hopefully be one of the reasons behind the increase and should offset some of the negative effects of high interest rates for REITs.

Given the recent pullback in REITs, now may be the opportunity to buy, not sell, the diversified leaders of the REIT industry, all of which pay out dividends over 3%. Out of all the trailblazers, Realty Income Corp (NYSE:O) appears to be the most intriguing, with a dividend yielding over 5% and a real estate portfolio that’s grown 151% over the past decade.

Looking toward the future, investors should look for a stabilization of interest rates and comments from the Fed to dictate their investment strategy.

The article Wait! Before You Sell Your REITs originally appeared on Fool.com and is written by Ryan Guenette.

Ryan Guenette has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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