REITs had another solid performance in May as the FTSE NAREIT All REITs Index posted a total return of 2.8 percent, ahead of the 2.4 percent return for the S&P 500 Index.
Year-to-date, the FTSE NAREIT All REITs Index has advanced 14.8 percent, while the S&P 500 Index is up 5.0 percent.
“It’s another positive month, continuing the upward trend of the year,” noted Jeff Langbaum, REIT analyst for Bloomberg Industries.
Paul Adornato, managing director at BMO Capital Markets, added that the year started off strongly with REITs outperforming the broader market by more than 700 basis points. “That outperformance has continued – we’re almost at midyear and REITs are having a very, very good year,” he said.
Adornato added that first quarter earnings showed strong fundamentals across almost all REIT property sectors. He noted that his firm is receiving more inquiries from generalist investors who are attracted by the REIT industry’s outperformance.
Meanwhile, Bloomberg’s Langbaum pointed out that full-year 2014 earnings guidance has been raised by a number of companies that he follows in the office, apartment, retail and health care REIT segments.
“You’ve got positive sentiment coming from these management teams for what the rest of the year is going to look like, even in the face of some short-term issues in the first quarter,” Langbaum said.
Both Langbaum and Adornato pointed to a flurry of recent capital market activity, particularly on the equity side, as evidence of investor confidence in the REIT sector.
“This means that the investor community is also optimistic about the prospects for REITs because they put new money into a lot of different stocks, including some initial public offerings (IPOs),” according to Adornato.
Langbaum said the “pretty sizeable equity offerings” seen lately will weigh somewhat on REIT shares “until it’s proven that there’s real long-term growth that can be attained by using those proceeds. That’s another trend that bears watching.”
Apartment REITs Bounce Back
Langbaum highlighted the strong performance of apartment REITs during the month after they underperformed in April. He noted that generally positive earnings reports plus rotation back into the sector were likely factors behind May’s gains.
Adornato, meanwhile, noted that REIT sectors are starting to perform in a similar pattern: “We see consistent performance across sectors, which is a little bit unusual. Part of that is due to the fact that the fundamentals are pretty good across different property sectors, and it’s hard to find sectors that are truly struggling in this environment.”
One REIT segment that did face challenges in May was health care, where returns totaled 1.6 percent following gains of 6.8 percent the month before. Adornato explained that there are concerns among investors that some of the largest health care REITs will have a more difficult time growing in the future because of their size.