05/07/2014 | By Mitch Irzinski
In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, offered an analysis of how the REIT market performed in April and what has driven REIT performance so far in 2014.
Case said that “April was another strong month for REITs,” noting that the performance of REITs was not matched by the broader stock market. REIT investors have seen a total return of 11.7 percent in just the first four months of the year, whereas investors in large cap stocks have seen returns of less than 6.2 percent, and investors in small cap stocks have seen losses of about 2.8 percent.
Case explained the economic conditions causing the strong performance.
“When interest rates go up, it’s because the macro economy is strengthening, and that’s certainly the situation we are in now,” he said. “When the macro economy is strengthening, REIT returns typically go up, because strength in the macro-economy means higher occupancy levels, better rent growth, and therefore property values go up and also dividends for REIT investors go up.”
Case also discussed the strength of yields for REIT investors, as well as which sectors are performing well.
“REIT yields are still quite strong,” he said. “For yield-oriented investors, I think there are several sectors of the REIT market that they should be particularly considering. In looking at mortgage REITs, home financing mortgage REITs are providing very strong yields, better than 10 percent still. I think going forward, there’s a lot of discussion as to whether the government sponsored enterprises, Freddie Mac and Freddie Mae, have a future in that industry. If they do not have a future in that industry, in terms of buying mortgages from banks, there’s going to have to be a part of the financial market that can hold the mortgages that Freddie Mac and Freddie Mae used to hold — I think investors will look to residential mortgage REITs to fill that. So that’s a combination of a very strong current dividend yield, with potentially an intriguing growth story going forward. A couple of other sectors, REIT preferred stocks are actually quite similar to mortgage REITs, in that they provide very strong current income.”