FTSE Nareit All REITs Index Down 0.1% in December

REIT returns were marginally lower in December, as the REIT market produced total returns of more than 9 percent in 2017.

The total returns of the FTSE Nareit All REITs Index fell 0.1 percent in December, while the S&P 500 posted a total return of 1.1 percent. For the year, the FTSE Nareit All REITs Index gained 9.3 percent; the S&P 500 returned 21.8 percent.

Total returns of the FTSE Nareit All Equity REITs Index fell 0.3 percent lower in December, but gained 8.7 percent for the year. The total returns of the FTSE Nareit Mortgage REIT Index gained 2.5 percent in December and 19.8 percent for all of 2017.

The yield on the 10-year Treasury note was flat in December and for 2017.

Alexander Goldfarb, managing director at Sandler O’Neill & Partners, pointed out that the traditional REIT property sectors—retail, office and apartments—had lackluster performances compared with newer property sectors such as industrial, cell tower and data center REITs. “There were a few doing a lot of work for the many,” he said.

Matt Kopsky, a REIT analyst with Edward Jones, said REITs underperformed in December in part due to perceptions that the industry will not benefit as much as other corporate sectors from changes to the tax code.

Goldfarb said the consensus forecast for growth in REIT funds from operations (FFO) for 2018 and 2019 is approximately 5 percent annually, compared with anticipated earnings growth of 10-11 percent annually from the S&P 500. “There’s better growth elsewhere,” he observed.

However, assuming no signs of a downturn, Goldfarb said REITs could come back in favor as the valuation gap with the broader market widens. In addition, investor interest in REITs could grow given the number of REITs that have flat 2018 growth estimates but anticipate improvement for 2019, he noted.

Turning to individual property sectors, retail REITs posted total returns of 3.7 percent in December. Kopsky noted that mall REITs, which had total returns of 4.8 percent for the month, benefited from news of the merger between Unibail-Rodamco (PAR: UL:PA) and Westfield Corp. (ASX: WFD) along with a holiday shopping season that exceeded expectations and levels set in the past several years.

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