A Real Estate Investment Trust (REIT) is “any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages” according to U.S. Federal income tax law.
In layman’s terms, this means a REIT is a company that owns and operates real estate, typically in the form of office buildings, retail stores, hospitals, warehouses, hotels and more. Being able to avoid part or all of their income tax liabilities, REITs are able to distribute large amounts of income to investors and we frequently see very high dividends making them a potentially very profitable investment.
Because their income is tied to the value of the land they hold REITs took an especially large hit during the 2008-2009 financial crisis, with the Dow Jones Equity REIT Index falling almost 70% and thus giving investors a bargain for future growth. And although not quite as drastic, another bargain on these real estate instruments has revealed itself as investors oversell.
REITs are a great investment right now.
The first notable REIT that has been oversold recently is MorningStar’s Exchange Traded Fund (ETF), the IShares FTSE EPRA/NAREIT Developed Real Estate Ex-US Index Fund which has a portfolio of 170 different REITs.
These holdings amount to a total net asset value of $1.9 billion, mainly in the Greater Asia region (68%) followed by Europe (26%) and North America (6%). The high value of IFGL’s assets makes it one of the largest REIT ETFs, but with a market capitalization of only $837 million it could be severely undervalued. According to Forbes, the Relative Strength Index (RSI) of IFGL is 29.95 officially giving the ETF the “oversold” title. Any stock with a reading of less than 30 is considered oversold according to the RSI.
MorningStar’s Credit Analysis ranks IFGL in the bottom 20% of REIT ETFs for price/prospective earnings ratio and price/book ratio, as well as in the top 20% of ETFs for a dividend yield giving investors 2.12%. These first two ratios indicate to investors that at the current price, IFGL is definitely a bargain.
The reason for this overselling is largely due to Boston’s Windhaven Investment Management, an investment advisory firm which dropped its 29 million shares of IFGL, worth half the ETF’s assets at $845 million. Windhaven refused contact from Dow Jones Newswires regarding the sale. Effectively this single event brought IFGL into oversold territory, giving investors the chance to buy low before the share price finds its equilibrium again.