EQUITY REITs UNDERPERFORM AND MORTGAGE REITs OUTPERFORM BROADER EQUITY MARKET IN 2016
EQUITY REITs HAVE LOWEST DEBT RATIO IN 20 YEARS
The total return of the U.S. Equity REIT market fell short of the S&P 500’s gain in 2016, while Mortgage REITs nearly doubled the total return of the broader equity market, the National Association of Real Estate Investment Trusts (NAREIT) reported.
The FTSE NAREIT All Equity REITs Index had an 8.63 percent total return and the FTSE NAREIT All REITs Index, the broadest index of the U.S. REIT market including both Equity and Mortgage REITs, was up 9.28 percent for 2016, compared with the S&P 500’s 11.96 percent total return for the year. The FTSE NAREIT Mortgage REITs Index delivered a 22.85 percent total return for 2016 – the product of a 10.00 percent price return and a 12.85 percent income return.
Equity REIT total returns accelerated ahead of the broader equity market in December. The FTSE NAREIT All Equity REITs Index was up 4.46 percent compared to the S&P 500’s 1.98 percent gain for the month. The FTSE NAREIT All REITs Index was up 4.20 percent in December, and the FTSE NAREIT Mortgage REITs Index gained 0.65 percent.
“Equity REITs delivered strong results in the first half of 2016, but faced headwinds, in part from investor concerns about rising interest rates, in the second half,” said NAREIT President and CEO Steven A. Wechsler.
Double-digit Returns in Many Property Segments
Ten Equity REIT market segments – more than half of the property segments in the FTSE NAREIT All Equity REITs Index – had double-digit total returns in 2016. The Industrial Sector, whose distribution centers are critical components of the internet commerce marketplace, was the top performing Equity REIT market segment with a 30.72 percent total return for the year. The Single Family Home segment was up 26.65 percent, benefiting from professional management, scale and national brand building in a largely fragmented marketplace. Data Centers, which house the computer servers that enable cloud computing, were up 26.41 percent, and the Lodging/Resorts Sector was up 24.34 percent.
Other Equity REIT segments with double-digit total returns were:
- Specialty, up 19.95 percent
- Free Standing Retail, up 17.02 percent
- Manufactured Homes, up 14.15 percent
- Office, up 13.17 percent
- Diversified, up 10.27 percent
- Infrastructure, up 10.04 percent
Among Mortgage REITs, the Home Financing segment outperformed the FTSE NAREIT Mortgage REITs Index with a 25.87 percent total return for the year. The total return of the Commercial Financing segment was 14.33 percent.
Dividend Yields Remain Attractive to Income Investors
REITs continued to provide solid dividend yields in 2016. The dividend yield of the FTSE NAREIT All REITs Index was 4.32 percent on December 31, the yield of the FTSE NAREIT All Equity REITs Index was 3.96 percent and the yield of the FTSE NAREIT Mortgage REITs Index was 10.60 percent. In comparison, the dividend yield of the S&P 500 Index was 2.10 percent.
Six Equity REIT property segments had dividend yields greater than the FTSE NAREIT All Equity REITs Index’s yield. The Specialty Sector’s dividend yield was 6.29 percent; the Lodging/Resorts yield was 5.69 percent; the Health Care Sector’s yield was 5.41 percent; Free Standing Retail’s yield was 4.65 percent; the Diversified Sector’s yield was 4.56 percent and Timber REITs’ yield was 4.06 percent.
In the Mortgage REIT marketplace, the Home Financing Mortgage REIT segment outperformed the FTSE NAREIT Mortgage REITs Index with an 11.47 percent dividend yield. The dividend yield of the Commercial Financing segment was 8.36 percent.
Lower Leverage, Longer Debt Maturities for Equity REITs
The U.S. REIT industry had significant support from the public capital markets in 2016. The industry raised $69.6 billion in equity and debt in the public markets in the year, up from $59.3 billion in 2015 and the most since the $77 billion raised in 2013. The equity market capitalization of the FTSE NAREIT All REITs Index was $1.02 trillion at December 31.
In an environment in which many investors are considering the implications of higher borrowing costs, balance sheets for the U.S. Equity REIT industry have continued to reflect steady improvement – the product of lower leverage levels, longer debt maturities and an emphasis on equity over debt in capital structures.
On September 30, 2016, the debt-to-total market capitalization of the Equity REIT market (debt divided by the sum of debt and equity) was 31.9 percent, the lowest since the end of 1997. The debt-to-total book-assets ratio of the market was 49.0 percent, down from a post-crisis peak of 57.5 percent in the first quarter of 2009, and the lowest level on record since 2000.
The overall reduction in debt is largely the result of Equity REITs taking advantage of robust capital markets to issue approximately $280 billion in equity capital since 2010, representing 60.0 percent of the total industry capital raised during the period.
In addition to reducing leverage, REITs have extended their debt maturities. As of the third quarter 2016, the weighted average maturity of all Equity REIT debt was 70 months, or nearly six years, up from 60 months at the end of 2009.
The combination of strong earnings and a sharp decline in market interest rates following the financial crisis also has helped U.S. Equity REITs improve their underlying liquidity position. The interest coverage ratio for all Equity REITs stood at 4.5x at the end of the third quarter of 2016, representing the highest level achieved for the industry in the past decade and a half.
“The combination of less debt and longer maturities on Equity REITs’ balance sheets has positioned them extremely well for whatever economic environment lies ahead,” Wechsler said.
REIT Returns Up In Most Global Markets
REITs have been established in 36 countries around the globe, and approximately three-fourths of the $1.48 trillion equity market capitalization of the FTSE EPRA/NAREIT Global Real Estate Index, the leading global index for listed real estate, was accounted for by REITs on December 31, 2016. The global index delivered a 4.62 percent total return (based in U.S. dollars) in 2016. The index’s top performing region was Middle East/Africa with a 25.07 percent total return for the year. The Americas followed with an 8.20 percent return. The Asia/Pacific region gained 3.74 percent, and Europe fell 7.22 percent.