Finally Out of Negative Territory, REITs Make a Minor Rebound

BTIG has some good news about REITs: Heading into guidance season, they are up 0.1%. That’s much better than the 27.0% loss during 2022.

BTIG also has some, if not bad, then very cautious news. “Not that this is any time for complacency, though, as we remember well that REITs were flat through 1Q22 before the carnival ride started in earnest,” they wrote in a recent report. And that’s why investors should eye dividends to “play a more prominent role in REIT returns by providing at least some baseline of return expectations for investors.”

In one sense, the turn from -27% to +0.1% is a big change. But, as the firm notes, trying to understand what REITs might do going forward is like, as they put it with some linguistic flair, “a demonic choose-your-own-adventure or a market-based Rorschach test, differing views on any of these key variables could lead investors to very different conclusions.”

The past is not necessarily precursor to future performance, but it can make sense to pay attention to what has happened recently. “Through the end of 2022, the best three performing groups were Free Standing (down 6.1%), Specialty (down 8.7%) and Strip Centers (down 12.2%),” BTIG writes. “For returns thus far in 2023, those top three sectors from 2022 now rank numbers nine, twelve, and thirteen, near or at the bottom of the pack. Conversely, Health Care, Industrials and Data Centers are off to the best starts in 2023 after ranking sixth, eleventh, and tenth, respectively, in 2022 returns.”

Maybe healthcare is a good bet given all the financial whiplash analysts and investors might be experiencing with the up-today-down-tomorrow volatility.

It’s still early to know how REITs will have done in 2022 Q4 earnings but not too early to identify three questions that BTIG thinks are important in trying to understand where things are now and where they might be headed.

The first question is about the impact of a recession, should one officially come (and to remember that won’t be known until after the fact). But what REIT management teams think of the future should show through in their forecasts. And then, investors need to decide whether, if companies offer earnings warnings going forward, if they’re being conservative or actually expecting significant challenges.

Next, will REIT guidance consider transactions? “To date, consensus estimates for most sectors still include at least some external activity at baseline,” BTIG writes. “Either way this sets up the potential for greater earnings volatility, especially for smaller portfolios.”

Finally, how are REITs looking at the future of financing. Credit spreads may convince them not to seek additional capital. “Especially for names with pending maturities, what are management’s expectations for 2023?” the firm asks.