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REIT Stocks in Free Fall, Thanks to Rate Hike Speculation

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It has always been a tough task for the Federal Reserve to time the interest rate hike or fall decision with microscopic precision. Mistiming a rate change decision can have catastrophic effects on the economy.

The Fed in a deviation from its stance of accommodative policy, raised the benchmark interest rates last December. Notably, before this hike, the rates were kept at near zero level for over seven years.

During the Dec 2015 rate hike decision, there was also consensus among the officials for further hikes in 2016. Per a New York Times report, “They thought the United States economy was finally strong enough — and the prospect of inflation close enough — that it was time to start raising interest rates back toward the level regarded as normal before the financial crisis.”

Though the economic growth continued, it lost momentum. Also, the inflation figure could not gather the strength necessary for an unhesitant approach towards a tight monetary policy. Further, global economic concerns acted as a dampener in the rate hike mood. There was divided stances among the Fed officials in regard to rate hike decision. Speculation on a possible rate hike did rounds in the market, affecting highly rate-sensitive sectors like real estate investment trust (“REIT”).

Impact on REITs

Before the results of the Fed meeting on Sep 20-21 come to the fore, let’s analyze the impact of the rate-hike speculation on the key REITs over the past one month period. Here, we have taken the three main REIT industries – REIT-Equity Trust-Other, REIT-Equity Trust-Retail and REIT-Equity Trust-Residential. The following table shows the price reaction:

Table: Price Movement of REITs Over Past One Month
REIT CategoryTotal Number of Zacks Covered Stocks% Price Change (4 wks)<0% Price Change (4 wks)<-5
Equity Trust-Other12210145
Equity Trust-Retail363410
Equity Trust-Residential31266

It is evident that more than 85% of the REIT stocks recorded price decline over the past four weeks and over 32% stocks saw price decline of over 5%.

The three categories, Equity Trust-Other, Equity Trust-Retail and Equity Trust-Residential, reported price fall of 83%, 94% and 84%, respectively over the past four weeks.

In the Equity Trust-Other category, Ashford Hospitality Trust, Inc. (AHT - Free Report) with a Zacks Rank #3 (Hold), recorded highest price fall of 13.3% over the past 4 weeks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the Equity Trust-Retail category, 28% companies reported price decline of more than 5% during the past one month period. In this industry, Washington Prime Group Inc. (WPG - Free Report) with a Zacks Rank #3 posted price fall of 11.1% in the past one month period.

Again, nearly 19% companies in the Equity Trust-Residential category saw price decrease by over 5%. In this industry, ACRE Realty Investors Inc. saw price decline of 14.4%.

The fact that only 15% of the REITs covered in the Zacks universe recorded price appreciation indicates strong impact of rate hike speculation on this sector. Whatever be the fundamentals, the adverse effect on price is significant.

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