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S&P 500 New Sector to Benefit DSTs

On Aug 31 an important shift in the stock market is set to occur, and we expect it will have a significant impact on Delaware Statutory Trust (DST) investors.

The S&P 500 is adding an 11th sector to more accurately index real estate investments. The new sector, “Equity Real Estate Investment Trusts” will include all real estate stocks that were previously grouped into the Financials sector. While this includes traded Real Estate Investment Trusts (REITs), it does not include Mortgage Real Estate Investment Trusts, which will remain in the Financials sector.

Though real estate investments were always included in the index, listing them in their own sector will emphasize the significance of the industry. This change is expected to cause a surge of capital into REITs. Investors who maybe hadn’t considered real estate in the past, will look at it from a new perspective now. Investors who determine their investment allocations based on the S&P 500 diversification model will be able to allocate additional capital into real estate rather than having to share allocation amounts with other stocks in the Financials sector, such as banks and insurance companies.

Bank of America Merrill Lynch suggested REITs would benefit by about $8 billion of additional capital invested as a result of this change. Goldman Sachs stated they believed the change would cause an increase of about $19 billion of additional capital for REITs. And JPMorgan Chase reportedly estimated an increase for the industry of as much as $100 billion.

There is no question that REITs will benefit from the change; the question is simply by how much will they benefit?

The exciting thing for us is that DSTs that are part of portfolios with retail single tenant NNN leases are going to benefit too.

With billions of dollars in capital shifting into REITs, REITs are going to need to expand their portfolios to continue paying out cash flows, but they won’t be out looking to buy just any property. REITs have high standards for the properties they acquire. Because a DST that has a portfolio of properties in them, such as retail NNN lease standards can also meet the REIT property requirements. DSTs like these will be able to satisfy the new demand REITs will have for high-value properties.

DST investors are going to find themselves as big winners as a result of this new sector because much of that new capital will flow through the REITs to DSTs in exchange for investment-grade property.

As we discussed in our Plan Your Exit blog, the DST model is to acquire highly desirable, investment-grade properties that have high resale value. In addition, DST properties usually seek contracts with single, credit-rated tenants for long-term, triple-net leases that have built-in annual rate increases, further increasing the sale value of the property. DST properties are prime candidates for REITs seeking new assets.

DSTs are valuable investments because they produce, residual income throughout the life of the investment as well as the pro-rata share of deprecation, and offer growth potential at the end of the investment cycle. Now, we expect DSTs will have even stronger growth potential as a result of this shift of focus in the stock market that will provide DSTs additional opportunities to fulfill their exit strategies and give DST investors further opportunities to complete 1031 exchanges and leverage their income for greater returns in subsequent investments.

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