This article is republished with permission from REITCafe.
Real estate investment trusts (REITs) pulled back in April, with a –4.95 percent total return for the month. Many REITs met or matched analysts’ first-quarter earnings expectations, but total REIT returns were negative throughout most of the month and took a sharp downward trajectory in the final days of April. Interest rates edged up during the month and signs of economic weakness also affected REITs and the broader markets with first-quarter GDP growth slowing to just 0.2 percent.
Minutes from the April Federal Open Market Committee (FOMC) meeting further reflected a lack of confidence in the economy. The Fed noted slowing jobs growth, weak housing market data, weaker spending by businesses and consumers, and export activity that has been negatively affected by the strength of the dollar. Although the Fed minutes did not indicate when an interest rate increase might occur, it appears unlikely to be aiming for a June increase and has most likely pushed its timing back to at least September. The lack of an imminent rate increase should have been good news for REITs, but the sector declined in response to the broader weak economic news.
| TREPP-i Survey Loan Spreads (50-59% LTV)* |
| This Week | Previous Week | Prev. Month | End 2014 | End 2013 | |
| Industrial | 153 | 155 | 143.75 | 138.5 | 170 |
| Retail | 154 | 156 | 147.5 | 139.8 | 175 |
| Office | 155 | 158 | 154.8 | 148 | 175 |
| Multifamilty | 148 | 149 | 141.25 | 139.8 | 166.7 |
| Average Spread | 152.5 | 154.5 | 146.25 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.12 | 1.92 | 1.84 | 2.17 | 3.04 |
Infrastructure REITs were the best-performing sector during April, with a 0.97 percent return. The two largest companies in the sector, American Tower and Crown Castle International (CCI), both beat analyst estimates for first-quarter earnings. CCI also announced a major expansion through its $1 billion purchase of Quanta Services’ fiber-optic licensing business. Infrastructure REITs are more closely tied to telecom industry expansion than traditional real estate, so their performance does not mirror the broader REIT sector.
Apartments ranked among the least bad sectors during the month, with a –3.70 percent return. Apartment demand has stayed strong throughout this economic recovery, and investors seem less concerned about potential oversupply. Nevertheless, apartment REITs were pulled down with the broader markets in April.
REITs were active with mergers, acquisitions, spin-offs, and initial public offerings (IPOs) during the month. April started with news that Sears had filed an S-11 registration statement for a REIT that will hold 254 properties and be called Seritage Growth Properties. Ventas announced plans to acquire hospital company Ardent Medical Services and spin off 355 skilled nursing and outpatient recovery centers into a new REIT to be called Care Capital Properties. Late in the month, Windstream Communications completed the spin-off of its telecommunications network assets into a new REIT called CS&L that began trading on NASDAQ. Also in an April IPO, Storage REIT National Storage raised $260 million.
REITs responded to a slight increase in interest rates and to weak economic news by pulling back in April. Still, underlying real estate fundamentals are solid, and the Fed has indicated that it likely will not raise interest rates before fall. These positives should drive further growth in the sector this year.
* 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 5/1/2015
