REIT ETFs Become Buyback Beneficiaries

Share repurchases by S&P 500 companies declined during the second quarter from first-quarter levels.

In the second quarter, share repurchases by S&P 500 member firms slid 8.7 percent to $131.6 billion, down from the $144.9 billion posted in Q1 2015, according to S&P Dow Jones Indices. The silver lining: On a year-over-year basis, share repurchases increased 13.2 percent over the $116.2 billion reported during the second quarter of 2014, said S&P Dow Jones. 

The technology and consumer discretionary sectors remained buyback leaders in the prior quarter, but real estate investment trusts (REITs), many of which are sporting compelling valuations, are getting in on the buyback game.

REITs and the ETFs that hold those stocks have been plagued this year by investors' expectations that the Federal Reserve will soon raise interest rates, but “an increasing number of REITs have instituted share repurchase programs in 2015, according to SNL Financial. A recent article titled "REITs, in droves, move to repurchase shares" (http://bit.ly/1Fs2CP4), by SNL's Jacob Wiggins and Tom Yeatts, noted that 28 REITs announced share repurchase plans year to date through September 15, with 17 of them occurring in just the third quarter. With the recent selloff in REIT shares, many companies are trading at notably high discounts to net asset value (NAV),” said S&P Capital IQ in a new research note. 

The First Trust S&P REIT Index Fund FRI, home to nearly $195 million in assets under management, has a significant percentage of its 158 holdings trading at deep discounts to NAV. For example, Brandywine Realty Trust BDN, CBL & Associates Inc. CBL and General Growth Properties Inc. GGP, each of which are buy-rated by S&P Capital IQ, trade at discounts of 20 percent or more to NAV, according to the research firm.

“According to S&P Capital IQ Equity Analyst Cathy Seifert, after rising 2% in 2014, GGP revenues will likely increase between 2% to 4% in 2015 and accelerate to 5% to 7% growth in 2016, primarily reflecting the impact of better rents and improved occupancy levels. Seifert thinks that a combination of earnings growth and portfolio pruning will help drive GGP shares higher. GGP has a 2.8% dividend yield,” said S&P Capital IQ.

Those stocks combine for three percent of FRI's weight. FRI tracks the S&P United States REIT Index, a benchmark with a dividend yield of 2.7 percent, or more than 50 basis points above where 10-year Treasury yields reside at this writing.

Nearly a quarter of FRI's holdings are retail REITs with another combined 31 percent allocated to residential and office REITs.