9/1/2016 | By Sarah Borchersen-Keto
REIT returns dipped in August, but they continue to outpace the broader market on a year-to-date basis as fundamentals remain stable across the industry, analysts said.
The total return of the FTSE/NAREIT All REIT Index dropped 3.3 percent in August, while the S&P 500 index held steady, up 0.1 percent. For the year through the end of August, the total return of the FTSE/NAREIT All REIT Index was 14.2 percent, while the S&P 500 posted a total return of 7.8 percent. The yield on the 10-year Treasury note dropped 0.7 percent in the first eight months of 2016.
“Expectations of an interest rate increase by the Federal Reserve may have been accelerated in recent days,” said Paul Adornato, managing director at BMO Capital Markets. Lingering concerns about the impact of the Brexit vote in the United Kingdom were also present at the start of August, he said, although those fears now seem to have calmed.
As for overall fundamentals, “the economic environment is really ideal for REITs: slow, steady job growth and new construction relatively under control,” said Roy Shepard, senior analyst at Edward Jones. Low interest rates have prompted a surge of unsecured bond offerings, allowing REITs to refinance debt, he added.
“Overall, the fundamentals for REITs are really solid from an earnings standpoint,” Shepard said.
Meanwhile, although Adornato considers REIT property valuations to be “reasonable,” he noted that stock price movements “make valuations a little bit more stretched.” Shepard pointed out that “prices are well above their previous highs in terms of property values, and that is a little bit concerning if we did have a slowdown in the economy.”
Adornato described the tone of the second quarter earnings season as “somewhat mixed.” There were some sectors, such as self-storage, that were “perceived as peaking, and perhaps expecting a tougher operating environment,” Adornato said.
Returns for single-family residential REITs fell 0.3 percent in August, although the sector was up 32.6 percent for the year to Aug. 31. Lodging REITs had the best performance in August, as returns dropped 0.1 percent. For the year to Aug. 31, lodging REITs posted returns of 13.6 percent.