Investors Send Mixed Signals on REITs

WASHINGTON, DC-It was bound to happen: earlier this year when the Federal Reserve Bank announced it would begin scaling back its bond buying program, investors began looking at REITs with new eyes. Why? Tapering would undoubtedly lead to higher interest rates, and higher interest rates, as conventional wisdom goes, is not good for REITs.

To be sure, there is plenty of evidence to counter that belief--but apparently not enough to sway enough investors reallocating capital away from these securities.

Yesterday the Wall Street Journal reported that the Dow Jones Equity All REIT Total Return index delivered a total return of minus-2.7% for the July-September period. This was the worst performance since the third quarter of 2011 and showed up poorly against the larger equity market's 5.2% gain for the third quarter.

The month of September, though, marked a turnaround for REITs, according to NAREIT data posted to the association's website. It reported that the FTSE/NAREIT All REIT Index saw its total returns climb 3.6% for the month, beating the broader market, with the S&P 500 down 3.1%. Brad Case, NAREIT's senior vice president for research and industry information, noted that the performance for September was a stark departure from previous, less-than-stellar months' performance.

"In the three or four months before September, REITs had been outperformed by the broad stock market," Case said. "Historically speaking, usually it's REITs that outperform the broad stock market."

Coincidentally, September was the month when the Fed indicated that it would not begin tapering after all, although it was definitely on the horizon.

However, it is too simple of an argument to say REITs' performance is directly and inevitability tied to interest rate movement, although they clearly do have some import.

Part of it is just that equities, in general, are doing so well this year and investors want a piece of that. 2013 has been a great year for the recovery of the broad stock market, Case said. "REITs had recovered earlier, so 2013 hasn't been such a strong year for REITs relative to the broad stock market."

Also there is the psychology of rising interest rates – many view it is a good thing because it indicates the economy is robust. The Fed, by doing an about face on its tapering decision sent a signal, whether it meant to or not, that all is not exactly well with the economy. That may have prompted investors to seek out defensive offerings.

The signals the capital markets are sending for REITs, however, are not completely mixed. Separately, SNL Financial reports that there has been a combined total of about $3.4 billion raised through REIT initial public offerings, year-to-date. Some 10 REITs have gone public, and SNL notes that out of these REITs, six have outperformed the market since the companies' respective IPO dates.

In addition to those completed IPOs, other REIT IPOs are in the pipeline, including the potential blockbuster Brixmor Property Group Inc., which is a spinoff of the retail properties Blackstone Group LP acquired from Centro Properties Group in 2011. Last month it was reported that Brixmor expects to secure $750 million from its initial public offering, making it the largest retail REIT IPO since Simon Property Group raised $840 million in 1993

In an amended registration statement, Brixmor reported its decision to leave voting rights exclusively with its shareholders, SNL notes, restricting its operating partnership's voting rights. Other REIT IPOs that have been announced in 2013, SNL says, include Ellington Housing Inc., Waypoint Homes Realty Trust Inc. and Colony American Homes Inc.