REITs Up 5% in July; Earnings Underscore Healthy Fundamentals

REITs turned higher in July as solid second quarter earnings reports reaffirmed that fundamentals in the sector remain healthy, analysts said.

The total returns of the FTSE/NAREIT All REIT Index gained 4.9 percent in July, while the S&P 500 Index rose 2.1 percent. The yield on the 10-year Treasury note dropped 0.1 percent for the month.

Through July 31, total returns from the FTSE/NAREIT All REIT Index for 2015 slipped 0.6 percent, while the S&P 500 Index was 3.4 percent higher in the same period.

Gains in July followed three straight months of declining REIT returns.

“The whole peer group snapped back pretty strongly this month,” said Jeffrey Langbaum, senior REIT analyst at Bloomberg Intelligence.

Ki Bin Kim, analyst at Sun Trust Robinson Humphrey, Inc. noted that earnings were “generally pretty decent. “ While interest rates were higher in July, they basically stabilized during the month, he said.

“You’ve had a little bit of the noise from interest rates quietening down,” Kim noted.

Langbaum indicated that the market already reflects the potential impact of rate hikes.

“Interest rates are still a very important piece of the puzzle,” he said. “The expectation that the Federal Reserve will lift rates before the end of the year is pretty well-accepted, so I don’t think there is as much positioning.”

Turning to specific sectors, returns in the self-storage segment were 11.5 percent higher in July, and the sector gained 15.7 percent for the year through July 31.

“It’s clearly the best-performing subsector for numerous years now, and this year is no different,” Kim said. Kim noted that same-store revenue growth has a strong runway for at least the next 18 months.

“There’s a lot of embedded growth in this sector right now,” Kim observed.

Returns in the apartment sector rose 6.1 percent in July. Langbaum pointed out that most apartment REITs have reported an increase in rent growth estimates and offered “very positive commentary about the state of the housing industry.”

Meanwhile, industrial sector returns rose 8.7 percent. “You’ve seen some really good earnings coming out of most of the industrial REITs," Kim said. He added that industrial sector earnings have not been reflected in stock prices due to “overly bearish sentiment” regarding oversupply risk.