As expected, the Fed didn’t move rates. Still, the market rejoiced with a minor rally.
The big reason for a market rally was the fact that the pace of future interest rate increases will be slower than expected. The pace at which the Fed plans to raise rates in 2016 and 2017, beyond the initial hike, was revised downward at the latest meeting.
One key with this is that stocks tied to interest rates are getting a little more breathing room. In particular, real estate investment trusts (REITs) should get more attention.
At the same time, Vanguard REIT Index Fund (NYSEArca: VNQ) is off by close to 7% over the last three months.
However, has the market been overreacting to the pending interest rate hike all along?
The rate hike is widely known. Assuming the markets truly are somewhat efficient, you have to believe the market is already pricing in a Fed rate hike to some degree.
What’s more is that the initial Fed rate hike will be minimal. So the 10-year Treasury yield, which is currently 2.3%, still won’t rival the yields on many REITs.
REITs with strong positions in their respective industries, yielding 3% or more, should still be on investors’ radars. All in all, things might not be as bad as them seem, especially when it comes to how interest rates will afffect REITs. We’ve got three REIT picks that are best in show, spanning the health care, hotel and retail industries:
Must-Own REIT No. 1: HCP Inc. (NYSE: HCP)
HCP is a major player in the health-care industry, which is a big positive right now. Spending on health care remains non-discretionary and a necessity, which means it doesn’t fluctuate with the broader economy. One positive is that HCP is making a move to get more exposure to the underrated senior living industry. It is buying up 35 properties from Chartwell Retirement Residences, a deal that’s expected to close next quarter.
Still, HCP shares have fallen by more than 7% in the last three months, pushed downward by the fear of an interest rate hike. This REIT offers a healthy dividend yield of 5.9%. HCP is among the ranks of the Dividend Aristocrats, having upped its dividend for 29 consecutive years.
Must-Own REIT No. 2: Host Hotels & Resorts (NYSE: HST)
Host Hotels is a key player in a rebounding hotel industry — a trend that should continue as oil prices remain relatively low. But the stock is down 15% year-to-date. Host Hotels owns luxury hotels, including top brands like Ritz-Carlton, Hyatt, Sheraton, Westin and Four Seasons.
The hotel REIT also offers a 4% dividend yield and has upped its dividend for four straight years. You also have a balance sheet that’s one of the strongest in the hotel REIT space. But the market continues to sell off this leading hotel REIT, despite the tailwinds from increased travel, thanks to a strengthening economy.
Must-Own REIT No. 3: Simon Property Group (NYSE: SPG)
Simon Property Group pays a 3.3% dividend yield and has upped its dividend for five years in a row. The real key is that Simon Property Group is the biggest player in the retail REIT space, with a suite of premium malls and relationships with nearly every major retailer.
It’s becoming even more of a focused retail REIT by targeting its high-growth opportunities. It spun off its smaller property portfolio as Washington Prime Group last year. Its occupancy rate is now at an impressive 95%, and with the spinoff, its tenant sales per square foot is on the rise.
In the end, the pending interest rate hike has dominated the headlines for long enough. It’ll happen, eventually and likely this year. But when it does, it won’t be as bad as the market is making it out to be. REITs are still a safe investment and offering compelling dividend yields at a time when the average S&P 500 dividend yield is under 2%.