FTSE Nareit All REITs Index Up 3.5% in May

REIT returns were higher in May as investor concern about the impact of higher interest rates on the sector receded somewhat, according to market watchers.

The total returns of the FTSE Nareit All REITs Index rose 3.5 percent in May, while the S&P 500 rose 2.4 percent. The total returns of the FTSE Nareit Mortgage REIT Index gained 2.7 percent in May.

The yield on the 10-year Treasury note dropped 0.1 percent in May.

“REITs performed well in the month of May. The overall economy is healthy and the 10-year was virtually flat, both accommodating for REITs,” said Matt Kopsky, analyst at Edward Jones.

Bloomberg Intelligence analyst Jeff Langbaum noted that REITs got a big boost at the end of the month when the 10-year Treasury yield fell sharply on Italian political instability.

Langbaum pointed out that since February, REITs had been “gradually ticking higher,” in tandem with a rising 10-year yield.

“I still think REIT performance is very tied to moves in the 10-year, but it feels like the market may have been getting more and more comfortable over the last couple of months with REITs in a higher yielding environment,” Langbaum said.

Turning to individual REIT property segments, lodging REITs booked returns of 11.9 percent in May. News earlier in the month that Blackstone Group LP planned to buy LaSalle Hotel Properties (NYSE: LHO) in a $4.8 billion all-cash transaction helped boost the sector, analysts said.

Returns for health care REITs gained 7.5 percent in May, while freestanding retail REIT returns rose 6.7 percent.

“These are typically higher-yielding names with more contractual-orientated growth rates, rather than more traditional growth stories, and those tend to perform better in a low-yield environment,” Langbaum said.

Retail REITs posted returns of 4.1 percent in May. Kopsky added that retail and health care REITs both bounced back and performed well in the month. “Earnings were better than feared for both of these property types and with depressed valuation levels it was enough to outperform,” he said.