A Profits Recession? Not for REITs

Financial markets have been troubled by a decline in corporate profits. Earnings per share of the S&P 500 fell 7.6 percent in the first quarter of 2016 compared to last year, prompting a drop in equity prices and concerns about the outlook. But trends are going the other direction in real estate.

Total Funds From Operations (FFO) of all equity REITs were $13.2 billion in the first quarter, a 19.5 percent gain over one year ago, according to the recently-released NAREIT T-Tracker®. There were solid increases across most sectors, with nearly all property types posting double-digit increases. For example, FFO of retail REITs was 22 percent higher than a year ago, and industrial posted a 19 percent gain, while FFO of office REITs increased 11 percent. The only sector with a decline in FFO over year ago was multifamily REITs, which reported FFO down less than a percentage point. Recent increases in construction of new apartments have tempered rent growth after several years of solid increases. The flat performance of FFO for the multifamily sector comes following a year with a 20 percent-plus increase, however, so performance was still quite good.

The contrast between REITs and the S&P 500 underscores the diversification benefits of including REITs in an investment portfolio. The declines in corporate earnings were concentrated in a few sectors, with energy firms posting a net loss in the quarter and financial firms showing earnings per share down 12.5 percent versus a year ago. Since equity REITs derive their income from leases on real estate, not from energy exploration or financial activities, REIT earnings respond to a different set of economic drivers—and often rise at times when other sectors may be struggling. S&P Dow Jones and MSCI have recognized the importance of listed equity real estate in investment portfolios, and later this year will include Real Estate as one of the top-line sectors in the S&P/MSCI GICS industry classification system.

For complete information on FFO, NOI and Dividends Paid by REITs, including downloadable spreadsheets, charts and tables, see the T-Tracker web page.

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The Market Commentary blog on reit.com presents analysis of the macro- and micro-economic fundamentals impacting the REIT and commercial real estate industry. The Nareit economics team offers their commentary on the state of the market, the outlook for commercial real estate and breaking macroeconomic news. The opinions set forth here are solely those of its author(s), and do not necessarily reflect the views of the Nareit or its membership. For more, see our Terms of Use.