REITs Get a Boost From a Flight to Safety

According to BTIG, “Last week served as another reminder that, at the moment, rates still dominate the conversation around REITs and performance. Geopolitical tensions led to a flight to safety and a decline in long-term yields of 16 bps on the week.”

The move, and the concern of markets to find safety, led to the REIT sector outperforming both the S&P 500 and the Russell 2000 — meaning large-cap and small-cap companies, or the market as a whole.

According to the BTIG data, the best-performing subsectors on one-week price returns were health care at 3.9% and malls at 2.5%. Next were single-family rentals (2.1%), strip centers (2.0%), office (1.8%), apartments (1.3%) and free-standing (1.0%).

The two sectors that did the worst were hotel, down 0.7%, and industrial, down 0.1%. The FTSE NAREIT Equity REITs were up 1.5%.

“We think that 3Q23 earnings season will bring additional clarity to 2024 estimates, and with the sector underperforming the broader markets YTD either REITs are well positioned for a relief rally or estimates will see more pressure,” BTIG wrote. “Our recent conversations suggest that there is a meaningful pool of capital closely looking at the more discounted names in the REIT sector, but are waiting for more clarity or catalysts. Any relief rally associated with 3Q earnings could bring more fund flows into the sector from the sideline.”

But year-to-date returns suggest that a quick move is not necessarily something to inspire confidence. The only two positive returns were 14.3% on single-family rentals and 4.5% for health care.

Everything else was negative, with hotels down 0.2%, apartments off 0.6%, industrial down 1.0%, malls down 4.1%, strip centers down 4.8%, free-standing down 16.4%, and office down 21%. The FTSE NAREIT equity REITs lost 2.4%.

A trailing twelve-month view shows significant differences from either of the other two. From top to bottom returns: mall (+18.9%); health care (+14.2%); industrial (9.1%); strip center (+7.8%); single-family rentals (+6.7%); hotel (-1.9%); apartments (-3.3%); free-standing (-7.0%); and office (-20.0%). The FTSE NAREIT equity REITs were up 4.3%.

The firm noted that while the spread between the REIT Average Implied Cap Rate and the 10-year Treasury yield had expanded during 2020, the spread is back to a normal range.