U.S. REITs Attractive in a Post-Brexit World

This article is republished with permission from REITCafe.

Thanks to strong market fundamentals, positive second-quarter earnings reports, and post-Brexit assurances of ongoing low interest rates, real estate investment trusts (REITs) pushed forward in July with a 3.87 percent total return. REITs outpaced the Dow Jones Industrial Average, and were on par with the S&P 500, but both the NASDAQ and Russell 2000 outperformed the sector.

The lodging segment posted the strongest total returns for July at 10.23 percent. Host Hotels and Resorts, whose stock value gained 10.5 percent, helped boost the sector. According to Smith Travel Research, lodging performance improved during the second quarter, with revenue per available room (RevPAR) gaining 3.5 percent versus 2.6 percent for the first quarter. Lower gas prices and airfares have caused many to anticipate strong summer lodging demand, and domestic travel has received an extra boost as global terrorism incidents and Zika virus concerns keep people within the United States. New hotel supply has increased, and while national construction is well below historical levels, it is a concern in markets like Houston, New York City, and San Francisco.

Strong July returns for timber REITs were fueled by the Weyerhaeuser Company, which is the largest REIT in the sector by far. Weyerhaeuser’s stock gained 9.09 percent during July. New home construction slipped during July, but building permit activity was up, indicating a budding pipeline for future development and demand for timber.

Demand from e-commerce tenants has fueled the industrial sector while builders have stayed cautious, focusing new development largely toward preleased space. Prologis received a big boost after a July announcement that earnings nearly doubled during the second quarter. Its stock gained 11.1 percent during the month, and the industrial REIT sector was up 8.38 percent for the month.

Some REIT sectors struggled during July. The data center REIT sector paused in July, posting a –S1.78 percent return. Still, data centers are one of the top-performing sectors this year, with a year-to-date return of 33.17 percent.

Self-storage REITs also lagged during July, with a –5.88 percent monthly return. All told, the sector has still experienced years of strong growth. New construction has increased, although it is low by historical standards. Still, Public Storage (PSA), the largest self-storage REIT, noted during its earnings call that an influx of new supply is creating challenges in some of its markets such as New York. PSA’s stock price fell 6.5 percent during July and has gotten off to a rocky start in August.

The REIT initial public offering (IPO) market is dormant, but several notable mergers were completed last month. Brookfield Asset Management Inc. completed the $2.8 billion acquisition of Rouse Properties on July 6, and Annaly Capital Management completed its $1.5 billion acquisition of Hatteras Financial Corporation, which was first announced in April. However, New York REIT (NYRT) and JBG called off their merger, which was originally announced in May. NYRT plans to sell individual assets and distribute proceeds to its stockholders.

REITs responded well to the Brexit referendum and the potential for a prolonged period of low interest rates, with a 3.87 percent total return in July. The month’s performance shows that REITs’ strong yields and healthy underlying property fundamentals make them attractive compared with other investment opportunities. No red flags indicate a market downturn yet, but some property types in some metro areas are softening, thus muddying the outlook for future growth.

* 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 8/5/2016.