Trepp: REITs Outperforming Broader Markets

Real estate investment trusts performed well in June even as global economic events rattled broader stock markets, reported Trepp, New York.

The FTSE NAREIT All REIT Index gained 6.68 percent in June, bringing the total return for the first half of 2016 to 13.65 percent. The S&P 500 Index of the largest U.S. stocks rose 2.7 percent in the first two quarters. 

Trepp Senior Director of Research Susan Persin said free-standing retail, single-family home, data center and manufactured home REITs all posted double-digit gains during June. 

“Several events in the month of June had positive implications for the REIT sector,” Persin said. “Most notably, Great Britain’s vote to exit the European Union shook financial markets worldwide. REITs, viewed as a safe haven by investors, stood up well as broader U.S. markets tumbled.” 

In addition, the probability that the Fed will raise interest rates in July or September fell significantly due to heightened global economic uncertainty resulting from the vote, Persin noted. “REITs will benefit from low interest rates because of their attractive yield and because they rely on borrowing for growth,” she said. “Uncertainty created by the vote could also trigger additional foreign investment in U.S. real estate and REITs.”

The U.S. economy remains healthy, with low unemployment and rising wages, Persin said. Low energy costs have boosted disposable income and consumer confidence climbed in June following two months of decreases.

“The opening of the $5.4 billion third set of locks on the Panama Canal was largely overlooked amidst the Brexit turmoil,” Persin said. The new locks opened on June 26th, increasing the size of ships that can move through the canal to 14,000 containers from the current 5,000-container maximum. “The expansion will have more of an impact on railroads that ship goods across the country than on industrial REITs, but it will change how and where goods are transported.”

Trepp reported significant REIT merger and acquisition activity during June. Colony Capital, Los Angeles, announced plans to merge with NorthStar Asset Management Group and NorthStar Realty Finance, New York, to create a new company with $58 billion in assets called Colony NorthStar. And the Weisman Group, Sherman Oaks, Calif., made a $1.48 billion unsolicited offer to acquire Ashford Hospitality Prime, Dallas. Ashford said Weisman Group’s offer “materially undervalues” the lodging REIT, “and it is our hope that with additional information you will be able to increase meaningfully your valuation of our high-quality hotel portfolio and provide our shareholders a price level that captures the inherent value of their ownership.”

Persin called real estate fundamentals “healthy” and noted that by late August both the S&P Dow Jones and MSCI Indices will reclassify equity REITs and other real estate companies from financial stocks into a new real estate sector. “REITs will gain new visibility and could become less volatile, since they will no longer be a small part of the financial sector,” she said, noting that many actively managed large-cap core mutual funds currently underweight REITs. She said mutual funds may push REIT values up further by buying shares ahead of the sector change, “or they may wait until REIT pricing is more favorable.”