REITs Make Gains in August

REITs picked up steam in August as the total return from the FTSE NAREIT All REITs Index gained 3.4 percent, slightly below the 4 percent increase in the S&P 500 Index during the same period.

As of the end of August, however, the FTSE NAREIT All REITs Index was up 19.8 percent for the year, compared to a 9.9 percent gain for the broader market.

Matt Werner, portfolio manager at Chilton Capital Management, noted that in August, “the REIT ascent continued thanks to another strong earnings season and further declining interest rates.”

“It’s been a good year so far,” said Anthony Paolone, senior analyst at JPMorgan. “We’ve been in a supportive environment with low rates and good fundamentals for landlords, and you’ve got a broader equity market that still has a desire for income-oriented stocks. That’s all good for REITs.”

Paolone cautioned, however, that the strong performance seen by stock exchange-listed REITs so far this year “may give some folks pause in putting some incremental capital into the space.”

Among the best sector performers in August were health care REITs, which had total returns of 5.1 percent in the month. The sector was up 23.2 percent for the year through August.

Werner attributed the gain in the sector to the further compression of bond yields. “Health care REITs should continue to be the most sensitive asset class to changes in interest rates,” he noted.

Infrastructure REITs also had a strong month, gaining 5.1 percent in August and 19.3 percent for the year to date.

Multifamily REITs, meanwhile, posted returns of 2.8 percent for the month. That brings the sector’s total return up to 30.1 percent for the year.

John Benda, a National Securities Corp. analyst, said multifamily REITs of all sizes are benefitting from a “compendium of issues.” A shift in the unemployment rate above historical averages and weak job creation, coupled with stagnant wages and tight mortgage credit availability, have blocked a lot of potential buyers from the market, according to Benda.

Traditional first-time home buyers are also saddled with student debt, Benda said. And although new supply is coming online, projects generally take several years, which has allowed REITs to increase prices at their existing properties, he added.

“You basically have a utopian environment for the multifamily rental space,” Benda said.