The U.S. REIT industry has been on a roller coaster so far this year. After a remarkable run in the first four months, the sector nosedived in May, as rising interest rates and skepticism about the Fed’s QE program spread caution in the market. The apprehensions spilled over to August.
But around mid-September, the REIT stage was again set for action with the Fed’s ‘no taper’ decision and lower GDP projections for 2013 and 2014, which indicated a continued low interest rate environment in the near term.
As a result, the REIT stocks rallied the most and outperformed the S&P 500. According to the data provided by REIT.com, on a total return basis, the broadest U.S. REIT Index – FTSE/NAREIT All REIT Index – gained 3.55%, outpacing 3.14% growth for the S&P 500 in September.
However, over the first nine months of 2013, REITs have underperformed the broad market. Total return of the FTSE NAREIT All REITs Index was up only 2.89% compared to the increase of 19.79% for the S&P 500. Notably, the FTSE NAREIT All Equity REITs Index moved north 3.03% while the FTSE NAREIT Mortgage REITs Index dropped 2.11%.
Dividends Are Key Attraction
REITs are required to distribute 90% of their annual taxable income in the form of dividends to shareholders. Yield-hungry investors thus have a large appetite for such stocks. This has enabled the industry to stand out and gain a footing over the last 15–20 years. (See: Is GRID a better Utility ETF choice?)
As of Sep 30, 2013, the dividend yield of the FTSE NAREIT All REITs Index was 4.34%. The yield of the FTSE NAREIT All Equity REITs Index was 3.68% while the FTSE NAREIT Mortgage REITs Index delivered a dividend yield of 11.33%. Clearly, the REITs continued to offer solid yields and outpaced the 2.14% dividend yield offered by the S&P 500 as of Sep 30.
REITs raised $60.6 billion in the first nine months of 2013. A solid IPO market in 2013 primarily made it happen.
In the first three quarters, REITs raised $3.08 billion through 14 IPOs that comfortably surpassed the $1.82 billion capital infusion through 8 IPOs in 2012. The third quarter has been the most active one with around $1.25 billion raised from 4 IPO offerings.
During the latest downturn, REITs were able to acquire premium properties from highly leveraged investors at heavy discounts. Furthermore, REITs typically have a large unencumbered pool of assets, which could provide an additional avenue to raise cash during crisis.
These assets, in turn, have provided the requisite wherewithal to the REIT industry to grow through strategic acquisitions over time. Moreover, the financing for sound properties is currently abundant as willing commercial real estate lenders continue to extend lending.
Macroeconomic issues and political drama have created tension in the market. According to the Fed, the tapering would occur when the economy strengthens and as per its recent statement, economic activity is expanding moderately and labor market conditions are improving. Yet, the unemployment level still remains high.
Moreover, we note that, though the third-quarter 2013 earnings picture has improved in the most recent week, the guidance still remains on the weak side, leading to negative estimate revisions at a majority of the companies.