REITs Dip in April; Fundamentals Remain Firm

REITs dipped slightly in April, but the industry continued to outpace the broader market on a year-to-date basis.

The total returns of the FTSE/NAREIT All REIT Index fell 1.7 percent in April, while the S&P 500 Index added 0.4 percent. Through the end of April, the total returns of the FTSE/NAREIT All REIT Index were 4.1 percent, while the S&P 500 Index was 1.7 percent higher. The yield on the 10-year Treasury note was 0.5 percent lower during the first four months of the year.

Daniel Donlan, managing director at Ladenburg Thalmann & Co., Inc., noted that concerns that the Federal Reserve might increase rates based on stronger economic data may have caused some investor jitters in April.

Fundamentals Still Strong

Despite the modest downturn in April, analysts say fundamentals remain solid across the REIT sector.

“Earnings have more or less reinforced the view that real estate fundamentals across most asset types remain fairly strong,” Donlan said.  

Matt Werner, a portfolio manager at Chilton Capital Management, noted that first quarter earnings released to date have been “great,” with many REITs beating estimates and raising their guidance. Looking broadly at macroeconomic developments last month, “there’s nothing that put any holes into the positive story surrounding REITs,” he added.

J. Scott Craig, a portfolio manager at Eaton Vance Management, observed that the supply-demand dynamic remains “quite favorable” for owners of property and owners of REIT stocks. “You have to look pretty hard to find exceptions” to the favorable supply-demand balance, such as the New York City hotel segment and suburban office space in Houston, Craig said. “The fact that you have to look so hard to find the exceptions says something quite favorable about the general environment,” he added.

Timberland REITs Rise

Turning to specific REIT segments, timberland REITs bucked the trend in April with total returns of 3.5 percent.  Returns for infrastructure REITs rose 2.0 percent in the month.

Through the end of April, returns for free standing retail REITs advanced 14.8 percent. “As long as rates are low and investors are hungry for yield, these companies are favorably positioned,” Donlan said.

Self-storage REITs fell 10.7 percent in April. Werner indicated that the sector’s returns were out of sync with its fundamental markers. “With earnings reports, it seems that the wind is still at their back from a fundamental point of view, he said, “but it does seem like the market is being a little more disciplined.”