REIT and Bank rally continue

S&P 500: +21.84 (+2.41%)

REITs
REITs have rallied hard as investors perceive that fresh capital will lead to stabilization of balance sheets, guaranteeing that the companies raising money won’t go bankrupt (see: General Growth Properties). In 2009, REITs have raised $10.6 billion from share sales.

Many believe that REITs are building war chests that will allow them to make opportunistic acquisitions of properties from struggling rivals. Still, building a war chest comes at a price, and in the case of these public stock offerings, that price is the dilution of current holders’ interests. The concern seems negligible when market values have swelled by two-thirds in the span of four weeks, but perhaps will become more of an issue if the rally runs out of steam.


Banks still rallying
Lenders are scrambling to raise cash, with several banks already raising capital through equity sales. Adequate capital or not, these shares have been in high demand this week.

Bank shares may be receiving a boost from long-only mutual funds that have very little exposure to the sector, and thus are rushing to add them before they disclose their holdings at the end of the month.

Also helping bank shares is the government’s commitment to not let any of the banks fail. This was the big concern when banks hit their lows in March. Now, it seems that investors are only focused on dilution risk since many firms will raise capital by offering new common equity or converting existing preferred shares into common shares. But, the real concern should be exposure to commercial real estate and credit card debt.


Peter Lazaroff, Junior Analyst