This article is republished with permission from REITCafe.
Real estate investment trusts (REITs) pulled back in April amid mixed news on interest rates and first-quarter earnings. The Fed’s decision to leave interest rates unchanged is good short-term news for REITs, but a rate increase in June or September remains on the table and is unsettling to investors. Many REITs announced quarterly earnings during April, and mergers and acquisitions activity was up. The FTSE NAREIT All REIT Index lost 1.66 percent in April, slightly worse than broader markets, but continuing to outperform on a year-to-date basis.
First-quarter REIT earnings announcements produced both hits and misses. Some of the largest REITs, including Simon Property Group, Boston Properties, Host Hotels and Resorts, and Welltower, exceeded first-quarter earnings consensus estimates. Prologis announced occupancy of 96.1 percent and a record 20.1 percent rental rate increase on lease renewals during the first quarter, but it also announced plans to cut its 2016 construction budget in order to keep supply and demand fundamentals strong.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2015 | End 2014 | |
| Industrial | 165 | 166 | 171 | 163 | 138.5 |
| Multifamily | 163 | 164 | 169 | 168 | 139.8 |
| Office | 178 | 176 | 178 | 168 | 148 |
| Retail | 165 | 166 | 171 | 168 | 139.8 |
| Average Spread | 167.75 | 168 | 172.25 | 166.75 | 141.5 |
| 10-year Treasury Yield** | 1.78 | 1.82 | 1.72 | 2.27 | 2.17 |
Other large REITs experienced difficulties during the quarter. Equity Residential met earnings estimates, but management noted that increased competition from new construction has led to greater concessions in New York City. Vornado Realty Trust missed estimates, while Armour Residential REIT posted weaker-than-expected earnings and cut its monthly dividend.
REIT merger and acquisition activity is on the upswing. High building valuations make it more profitable to acquire companies than the underlying real estate assets in some cases. Annaly Capital Management announced a $1.5 billion cash and stock deal to buy Hatteras Financial Corporation in early April. The deal will help it diversify and add to its adjustable-rate holdings. Apple Hospitality REIT and Apple REIT Ten are merging in a transaction with an implied value of $1.3 billion. April ended with an announcement by Cousins Properties that it will acquire Parkway Properties in a deal valued at $1.95 billion. The combined company will have 41 office properties totaling 15.8 million square feet located in Sun Belt markets. As part of the deal, both companies will spin off their Houston-based properties into a new REIT to be called HoustonCo that will localize the near-term risk and longer-term opportunity in Houston.
The first REIT initial public offering (IPO) of the year also occurred during April. MGM Growth Properties raised $1.05 billion during April. The stock is currently trading about 5 percent ahead of its $21 per share IPO price. The IPO priced at the high end of its target range. The REIT includes ten MGM properties.
First-quarter data show that real estate market fundamentals are mostly strong, with weak pockets emerging for certain property types in selected markets, as reflected in some REITs’ first-quarter earnings reports. With interest rates staying low, REITs are attractive investments, and they continue to outperform broader markets on a year-to-date basis.
* 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 5/6/2016.
