REITs Lose Ground in September; Continue to Lead Broader Market

REITs lost ground in September against the backdrop of a weakened broader market. The total return on the FTSE NAREIT All REITs Index dropped 5.6 percent for the month, the S&P 500 Index fell 1.4 percent.

As of the end of September, however, the FTSE NAREIT All REITs Index had gained 13.1 percent for the year, compared with an 8.3 percent gain for the S&P 500.

Haendel St. Juste, an equity research analyst with Morgan Stanley, said September’s performance was a “knee-jerk reaction” to the re-emergence of concerns regarding interest rate risk and the uptick in the 10-year Treasury note yield.  For the month of September, yields on 10-year notes rose 0.2 percent, reversing the previous month’s decline.

“The most significant concern right now is interest rates, and on top of that, we can layer in all the other headline news,” said Nikhil Bhalla, vice president for equity research at FBR Capital Markets & Co.

Yet, with regard to interest rate fears, “there’s more perception than reality,” Bhalla added.

Matt Werner, portfolio manager at Chilton Capital Management LLC, noted that despite the decline in REIT share prices,  “fundamentals still remain strong, and we view the pullback as an excellent buying opportunity.”

St. Juste said Morgan Stanley is forecasting REIT funds from operations (FFO) growth of 11 percent in 2014, slowing to roughly 8 percent in 2015. He also said he expects the REIT sector will face a challenging period for the remainder of the year in response to ongoing interest rate concerns, “pretty full valuations” for REIT stock prices, slowing growth and anticipated equity issuances.

St. Juste said he anticipates a “pretty sizeable” initial public offering (IPO) pipeline in the range of $4 billion through the end of the year. In addition, he pointed out that REITs raised almost $3 billion through secondary equity issuances in September.

“That’s a lot of paper for the REIT sector to be absorbing,” he said.

While all sectors lost ground in September, regional malls were among the better performers, dropping 3.2 percent, while self-storage REITs lost 3.8 percent. Meanwhile, health care REITs were hit hard by interest rate worries, analysts said, with the sector off 7.5 percent in September.