REITs Hold Steady in February; Fundamentals Positive

REITs fell back slightly in February, but fundamentals in the sector remain on a solid footing, according to analysts.

The total returns of the FTSE/NAREIT All REIT Index fell 0.3 percent in February, while the S&P 500 Index lost 0.1 percent. For the year to March 1, the total returns of the FTSE/NAREIT All REIT Index dropped 1.3 percent, while the S&P 500 Index fell 2.8 percent.

“We believe there could be more volatility, but the market seems more comfortable with the macroeconomic fundamentals,” said Paul Adornato, a managing director at BMO Capital Markets. “The fundamentals of real estate remain very strong.”

Rich Moore, a managing director at RBC Capital Markets, offered a similar outlook.

“The climate of fear seems to have abated. REIT fundamentals are good, the demand side of the equation is decent and there’s not that much new supply,” he noted.

Roy Shephard, a senior analyst at Edward Jones, observed that “in terms of the economy, it’s still quite a good environment for REITs.”

Shephard said February saw a continuation of low longer-term interest rates and a flattening of the yield curve. “That’s a good environment for REITs relative to other financials in terms of their financing cost,” he added.

One concern for Shephard, however, is widening of spreads between REITs’ borrowing rates in the bond market and the 10-year Treasury note, especially for REITs with lower credit ratings.

Meanwhile, Shephard noted that REITs’ fourth quarter earnings were generally in line with expectations. He added that a few REITs gave 2016 guidance that was a little bit below what Wall Street had expected.

“Some of the REITs have gotten a little more conservative in terms of their budgeting just because the economic outlook is a little bit uncertain if you’re going out a year or so,” Shephard said.

Moore described 2016 REIT guidance as “good, not great.” He stressed, however, that unless there is a major recession or financial markets collapse, “there’s really no reason to think that these guys won’t do very well.”

Freestanding retail REITs were among the top performing REIT segments for the year to March 1, with returns up 11.7 percent. Returns for data center REITs gained 5.1 percent in the same period, while returns for manufactured homes rose 4.4 percent.