This article is republished with permission from REITCafe.
As the year winds down, returns on real estate investments trusts (REITs) have continued to slump as gains in interest rates put downward pressure on the sector. According to the National Association of Real Estate Investment Trusts (NAREIT), the total returns for the FTSE/NAREIT All REIT Index dropped 2.0 percent in November while the Standard & Poor’s 500 gained 3.7 percent. For the FTSE/NAREIT All Equity Index, total returns fell 2.4 percent last month, while total returns for the FTSE NAREIT Mortgage REITs Index gained 1.7 percent.
Jeffrey Langbaum, senior REIT analyst at Bloomberg Intelligence, offered some insight on the sector’s performance. “The performance in the back half of the month, postelection, has been fairly negative because of the spike in the ten-year [Treasury] yield,” he said. “For some period of time, REITs are going to trade on the expectation and actual direction of interest rates and the ten-year.”
Brad Case, NAREIT senior vice president of research and industry information, noted that divergence was a major theme during November. For the fourth-consecutive month, returns for equity REITs were lower, whereas returns for mortgage REITs have climbed in three of the past four months. Performance by property segment is also split. In contrast with the overall trends, lodging and resort REITs are up more than 13 percent; timber, office, and specialty REITs have also performed solidly.
Future returns have historically proved to be predictable based on REIT dividend yield spreads and the relative difference between REIT net asset values and stock prices. These market signals are “all very bullish,” Case notes, and therefore dividend yields from equity REITs and mortgage REITs should remain strong despite the recent slump. While the increase in the ten-year Treasury yield hindered REIT performance in November, the fundamentals throughout the REIT space seem to remain solid, and Case says he sees little evidence that REITs are overvalued.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** – 10 yr. Treasury Yield as of 12/2/2016.