REITs Fall Back in February

After a solid start to the year in January, REITs lost ground in February as gains in the 10-year Treasury note prompted short-term capital flows out of the market.

Analysts stress, however, that positive fundamentals remain in place for the industry going forward.

The total returns of the FTSE NAREIT All REITs Index dipped approximately 2.6 percent in February, while the S&P 500 gained more than 5.8 percent for the month. For the year, the REIT market is up 2.9 percent, whereas the S&P 500 is up 2.6 percent.

The 10-year Treasury note rose 0.3 percent in the month, following declines in all of the three previous months.

Ki Bin Kim, a director at Sun Trust Robinson Humphrey, noted that “longer term, it’s still a very favorable interest rate environment for real estate.” In the short term, however, he said rate fluctuations “tend to create a little noise.”

Paul Morgan, a managing director at MLV & Co., said it is “a little disappointing” that the performance of the REIT market continues to be so closely tied to Treasury rates.

“There’s a certain component of macro-related flows that look at REITs as a vehicle to trade around when rates move,” Morgan said. “There’s been a lot of statistical evidence to show that that isn’t a good long-term trade and that REITs do very well in rising rate environments.”

“Fundamentally, the core drivers of performance are very much intact,” he added.

In addition to the 10-year Treasury note, the release of REIT fourth-quarter earnings played an important role in February’s market performance, according to Kim. “If REITs came in even meeting expectations or just slightly below, they really took a hit,” Kim said. While earnings were generally favorable across the REIT industry, “not many REITs surprised to the upside,” he said.

Turning to specific sectors, infrastructure REITs bucked the downward trend by posting total returns of 1.2 percent in February. For the year to March 2, manufactured home REITs posted the strongest performance with returns of 7.9 percent. Returns for self-storage REITs were 7.4 percent during the same period.