WASHINGTON, DC—If the perception is that REITs haven't quite kept pace with the stock market rally that has taken hold thus far in 2017, the numbers bear that out. NAREIT says that while REIT returns were decidedly in positive territory through June 30, they underperformed the broader market during that time frame.

For the first six months of '17, total returns of the FTSE NAREIT All REITs Index rose 5.4%, while the S&P 500 returned 9.3%. In a more recent time frame, though, it has been REITs outperforming the market as a whole: the All REITs Index rose 2% in June, compared to 0.6% for the S&P 500.

Total returns of the FTSE/NAREIT All Equity REITs Index gained 2% in June and rose 4.9% through the first six months of the year, NAREIT says. For the FTSE NAREIT Mortgage REIT Index, total returns rose 2.5% in June and 16% for the year's first six months—thereby outpacing the S&P 500 by a wide distance.

Brad Case, SVP for research and industry information at NAREIT, points out that most investors sought out more speculative investments during the first half of the year. Accordingly, value-oriented investments, including REITs, underperformed.

At the same time, REITs provided better returns than value-oriented non-REIT stocks, he says. “REITs continue to provide very attractive valuations with both yield spreads and price-to-net asset value spreads firmly in the bullish parts of their historical ranges.”

Matt Werner, portfolio manager at Chilton Capital Management, told NAREIT's Sarah Borchersen-Keto that at current pricing levels, REITs look attractive relative to equities and bonds. “We feel pretty good about the back half of the year,” Werner told Borchersen-Keto, adding that REITs are “right on track” to produce total returns in the mid-to-high single digits. He noted that there has been an absence of volatility in REIT performance over the past few months, aside from the retail segment.

Indeed, GlobeSt.com reported last month that although retail REITs have gotten a fair amount of largely negative attention lately due to the accelerated pace of announced store closures and bankruptcies from distressed retailers, the noise surrounding the sector drowned out a quieter narrative of solid performance in the first quarter from real estate trusts generally. S&P Global Ratings reported that REITs' Q1 results were generally in line with expectations, although they pointed to a trend of decelerating growth that S&P expects to continue for the balance of the year.

“We continue to expect stable credit quality and ratings cadence for the sector in 2017, and project NOI growth of 3.0% to 3.5% for our rated REIT universe,” according to a recent S&P report. That's based in part on REITs' “favorable” access to the capital markets in the first five months of this year.

Overall, REITs raised 23% more capital through May of '17 than in the first five months of 2016, according to S&P Global Market Intelligence. That equates to $19 billion of debt, $16 billion of common equity and $2 billon of preferred equity.

Case notes that if historical relationships continue to hold, then current valuation metrics suggest that over the next few years REIT investors could see annual returns in the low-to-mid double-digit ranges. REITs may outperform non-REIT stocks by five to seven percentage points per year on average, he says.

Instant Insights /

YTD, REITs Lagged S&P; In June, Reverse Was True

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