REIT Returns Underperform S&P 500, But There’s Hope for Hotels

REIT returns ended last week down nearly a half a percentage point, underperforming the S&P 500, according to a new report from BTIG.

Yields on 10-year Treasuries increased 5 basis points to 1.31% and the average implied cap rate hit 5.65%. The spread between the implied cap rate and the 10-year yield is now 434 basis points.

City Office, Medalist Diversified, Soterly Hotels, Ashford Hospitality, and CorEnergy Infra were the top REIT performers for the week ending August 27, with returns in excess of 12% and as high as 24%. On the flip side, Urstadt Biddle, GEO Group, Cown Castle, CIM Commercial, and Bluerock Residential were the bottom five performers.

Led by top performer Host Hotels, the hotel sector outperformed, with prices up 3.6% for the week. Average daily occupancy, a key driver for the sector, was above 2019 levels for the seventh week in a row, though occupancy and RevPAR were both beneath those levels. But a recent analysis from Fitch Ratings notes that the sector’s long-term RevPAR recovery “remains on track, despite the recent sharp uptrend” in COVID-19 infections.

“We have raised our expectation for 2021 RevPAR to 68% of the 2019 pre-pandemic level, compared with our previous forecast of 62%, but maintain our view that a full recovery will occur gradually through 2025 as safety concerns ease and group and business travel resume,” Fitch notes in its analysis. Lower price-point economy and midscale hotels are outperforming luxury hotels, which remain 10 to 20% below 2019 levels, but Fitch predicts RevPAR will reach 80% of 2019′s level by 2022 and 100% by 2025.

Meanwhile, industrial sector REITs underperformed last week and saw prices dip 2.3%, with Prologis standing out as the sector’s worst performer. And on the retail front, BTIG adjusted its price target for Simon Property Group to $177 from $125, noting that SPG’s second quarter results were ahead of projections.

“Although 2Q’s bottom line was boosted by a major one-time item, the FY guide was raised well above the one- time’s impact, indicating that retail sales, demand for space in malls, and revenue growth for the portfolio are all contributing to a faster recovery than previously assumed,” the BTIG report notes.