REITs in 2013: A Decidedly Mixed Bag

WASHINGTON, DC-REITs did not have a good 2013 performance wise, but the year was a winner in one respect: these companies raised a record level of capital, according to new NAREIT statistics.

The FTSE NAREIT All REITs Index gained 3.21% in total returns for the year, while FTSE NAREIT All Equity REITs Index delivered a 2.86%. By contrast, the S&P 500 delivered a 32.39% total return for the year.

But while investors fled these securities for their own portfolios, they welcomed REITs capital raising activities in other areas. NAREIT also reported that listed REITs raised a total of $76.96 billion of equity and debt in 2013, an amount that surpassed 2012's prior record of $73.33 billion.

It is little secret how and why REIT returns fared so poorly last year. In spring, then Federal Reserve Bank chairman Ben Bernanke signaled that tapering of its bond-buying program would begin. Interest rates shot up and investors, believing that REITs values would drop, fled the asset class.

There is indeed a long-held belief that interest rates and REIT returns are inversely related; NAREIT, however, has conducted research finding that rising interest rates--if they are a reflection of solid economic growth--do not necessarily have an adverse effect on REIT returns. Some in the industry would agree; others would not.

More to the larger point, the industry association argues that REIT investing and real estate in general should be a long-term play.

"Real estate is a strategic more than a tactical investment, and real estate investors have historically been rewarded for a long-term orientation," says NAREIT President and CEO Steven A. Wechsler in a prepared statement.

Real estate also serves as a diversification play, Wechsler continues, and in this regard they did their job. At the end of last year, the correlation of the FTSE NAREIT All REITs Index with the S&P 500 was 65%.

Some sectors of the REIT market delivered double-digit returns in 2013, NAREIT noted, pointing to the lodging/resorts sector, which produced a 27.18% total return, and manufactured homes, which returned 10.46 percent.

The capital raising activity, though, was clearly their sweet spot for the year.

A total of $5.71 billion was raised in 19 initial public offerings during the year – the largest amount raised in the largest number of IPOs since 2004 when $8.27 billion was raised in 29 IPOs, according to NAREIT.