REITs posted solid gains in February as increasing confidence in the economy and sound fundamentals helped the industry regain lost ground.
Total returns from the FTSE NAREIT All REIT Index gained 4.7 percent in February, a shade higher than the 4.6 percent increase recorded in the S&P 500 Index. The FTSE NAREIT All REIT Index gained 3.4 percent in January.
“REITs definitely bounced back,” said Alexander Goldfarb, a REIT analyst with Sandler O’Neill. REITs were helped in part by a pullback in the 10-year Treasury yield, he explained. “I think people have calmed down as far as concern over the 10-year backing up, and that’s helped REITs,” he said.
Yields on the 10-year Treasury were flat for February, compared with a gain of 1.26 percent for all of 2013.
“It was a very strong month in February,” said Brad Case, NAREIT senior vice president for research and industry information. “Investors have more confidence in the state of economic growth in the country and in the role that the Federal Reserve will play in promoting that growth.”
Goldfarb noted that as investors have seen more of the 2014 economic data, “a lot of people are realizing that not much has really changed… It’s this very stagnant growth, and there’s nothing that’s really going to change that. The positive is that the economy continues to grow, but the negative is that it’s not growing the way it should following such a dramatic downturn.”
Regarding 2014, SNL Financial analyst Jim Stevens remarked that “with two months under our belts, the REIT performance is solid thus far.” The gains reflect the opinion that fundamentals look sound, he said.
“REITs have continued to perform in terms of operational fundamentals amidst rising interest rates - they’ve still been able to produce solid fundamental results,” Stevens said.
Goldfarb noted that good earnings results are being seen across many REIT sectors. He said that after delivering “pretty healthy” funds from operations (FFO) growth last year, REITs should post year-over-year FFO growth of about 10 percent this year, with growth of about 7.5 percent next year.
Turning to specific REIT segments, Goldfarb pointed out that apartment REITs “have gotten a lot of their mojo back” this year. Oversupply remains a factor to be dealt with, “but most markets should be able to power through these supply concerns,” he said. Through March 4, total returns in the apartment REIT sector were at 14.3 percent, as measured by NAREIT data.
Other strong performers in February included the self-storage sector, Stevens noted. Total returns in the self-storage sector were 7.3 percent for February, according to NAREIT data, and with a 14.4 percent gain for the year through March 4.
The health care sector lagged the rest of the U.S. REIT market with a total return of 1.0 percent for the month of February.