REITs Move Higher in February

Market watchers said fundamentals for the REIT industry remain healthy, as REIT returns tracked the broader market in February.

The FTSE/NAREIT All REIT Index had a total return of 4.2 percent in February, slightly above the S&P 500 index’s return of 4 percent. Total returns of the FTSE/NAREIT All Equity REIT Index were 4.0 percent in February. The FTSE NAREIT Mortgage REITs Index produced a total return of 5.8 percent. The yield on the 10-year Treasury note fell 0.1 percent for the month.

Brad Case, senior vice president for research and industry information at NAREIT, noted that gains last month were generated by the strength of macroeconomic conditions.

“Going forward, investors have increasing confidence in the underlying conditions that create strong growth in earnings, especially in the real estate market,” Case said.

David Rodgers, senior analyst at Robert W. Baird & Co., commented that “we generally saw that real estate credit spreads were flat and the 10-year came down for much of the month. That gave people  some confidence.”

Rodgers said REIT returns in February were “decent,” given all the potential headwinds the sector is facing, including possible changes to the tax code. “We continue to see fairly healthy fundamentals for late-cycle real estate overall,” he noted. 

Although REITs have underperformed the broader market for the past year, Case noted that the spread between the average dividend yield for REITs and other measures of interest rates is “still quite strong, and that is a very optimistic signal going forward.” Other measures of REIT valuations imply a “bullish outlook” for REIT investors, Case said.

Limited Possibility for Rent Growth

Daniel Donlan, managing director at Ladenburg Thalmann & Co., Inc., sounded a note of caution. He said he expects REITs to come under pressure in the months ahead due to the rising rate environment, the maturity of the current real estate cycle and new supply of real estate.

“We’re too far along in the real estate cycle for there to be rent growth,” he noted. Furthermore, strong occupancy levels can’t be pushed much higher, according to Donlan.

Turning to particular property sectors, infrastructure REITs were the strongest performers in February with total returns of 9.0 percent.

Returns for single-family rental home REITs stood at 7.9 percent during the month. “We’re seeing the maturing of a new segment of the REIT market, with very strong returns over the past year,” Case said of the subsector’s performance.