Equity, Mortgage REITs on Divergent Paths in November

Brad Case

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, noted that Equity REITs and Mortgage REITs have been on divergent paths in recent months.

The total returns of the FTSE NAREIT All REITs Index dropped 2.0 percent in November, while the S&P 500 Index gained 3.7 percent. Total returns of the FTSE NAREIT All Equity REITs Index fell 2.4 percent in November, while total returns of the FTSE NAREIT Mortgage REITs Index gained 1.7 percent.

“In November, we saw some pretty dramatic divergence between different parts of the investment market,” Case said. While returns on Equity REITs were lower for the fourth consecutive month, returns for Mortgage REITs climbed and have been in positive territory for three of the last four months, he added.

Divergence was also a major theme in terms of property segment performance during November. Lodging and resort REITs, up more than 13 percent, bucked the overall trend, Case said. Timber, office and specialty REITs also performed positively, he noted.

Despite the cautious tone of the market, Case pointed out that dividend yields from Equity REITs and Mortgage REITs remain strong.

Turning to fundamentals, Case observed that “overall, fundamentals are quite strong throughout the REIT space, and, frankly, we have very little reason to think they’ll soon weaken.”

Construction activity has been low in most property types nationwide, Case said. At the same time, essentially every REIT has a diverse portfolio, so companies are not overexposed to any particular market, he added.

Case also said he sees little evidence that REITs are overvalued. Signals that have historically proven reliable in predicting future returns, such as REIT dividend yield spreads and the relative difference between REIT stock prices and net asset values, “are all very bullish,” he said.