Was that the bottom?
One can never know the bottom of a bear market while it is happening. A bottom can only be definitively identified post hoc with the benefit of hindsight and a demonstrated rally that is already in the books. Thus, when I suggest that this might be the bottom there is huge room for error in that statement. There are, however, a series of reasons why I think this may have been the bottom.
- With the turn of the calendar, tax loss selling is no longer a factor and when 31 days from initial sale pass, the tax loss sellers may start buying back into those same securities that have been impacted. As tax loss selling has been spread over the past month or 2, the buying back may have already started.
- The 10-year Treasury yield is down to 2.74% making average REIT yields around 4% look strong in comparison. Higher yielding REITs such as those in 2CHYP may be sufficiently high such that they no longer compete with treasuries as income plays.
- As of 12/27/18, the mean REIT trades at a 18.3% discount to NAV and a median discount of 17.6% to NAV.
- As of 12/27/18 the mean REIT trades at 13.3X 2019 consensus FFO and the median REIT at 13.1X consensus FFO.
As shown by the continued drop after REITs were already cheap, favorable valuation does not always make the market go up, but when the value gets deep enough, it creates upward pressure. REITs are now trading at multiples that imply little or no growth, while fundamentals still show growth. This should serve as an upward catalyst in earnings season.
One of the weakest sections of REITs has been retail and preliminary data portends good things ahead. From November 1st through Christmas Eve, retail sales were up 5.1% to over $850B according to data from Mastercard SpendingPulse. Mall REITs often have participating rent so these strong sales should translate to healthy 4Q18 earnings.