Wednesday, January 2, 2019

REITs Performed Better Than S&P 500

Shares in real estate investment trusts, long considered a solid standby for conservative investors, are heading into 2019 after outperforming the overall market in a year marked by drops in big-name companies such as Facebook and General Electric.

After equities trading ended for 2018 on Monday, the Standard & Poor’s United States REIT index had a negative total gross return, or performance before expenses, of 4.06 percent, a smaller decline than the 6.2 percent drop for the entire S&P 500.

While both indices were in negative territory after a fourth quarter in which the S&P 500 zigzagged between positive and negative territory, REITs ended the year ahead largely because of increased confidence in real estate amid overall economic uncertainty.

The overall S&P 500 spent most of 2018 outpacing REIT stocks after eclipsing REITs halfway through 2017 following years of the market trailing REITs since the end of the recession, according to S&P Dow Jones Indices.

When the dust settled late Monday, 2018 was the worst year for stocks since 2008, based on the annual performance of the S&P 500 index. Several factors to a selloff across equities markets, including concern over the dollar and tariffs, the potential for further interest rate increases by the Federal Reserve and economic concerns about countries such as China, Great Britain and Saudi Arabia.

REITs, the publicly traded owners of finance income-producing properties, own real estate rather than run consumer-product or service businesses so they are often better positioned to weather economic fluctuations.

Overall, leverage ratios, or the amount of debt an organization is using to make deals, are at a record low for REITs, according to an analysis by Nareit, the industry association for REIT professionals. These companies have relied on equity more than loans or other forms of debt to make their investments in the past decade, reducing debt exposure and better insulating them from interest rate changes, Nareit said.

Among REITs, those with a residential focus performed best in 2018, according to Nariet. Manufactured home REITs returned 10.45 percent through Dec. 28, with apartment REITs returning 3.08 percent.

Several high-profile multifamily REITs were busy in 2018, including real estate mogul Sam Zell’s Equity Residential, which made several large acquisitions over the year and in high-yield apartment markets. The company’s stock ended the year up almost 4 percent.

Equity Residential re-entered the Denver market with two of the city’s largest apartment deals of the year, totaling almost $275 million. The Chicago company also brought on a new chief executive in 2018 and is heavily invested in Southern California and Washington, D.C., both hot markets with tremendous growth potential for apartments. Technology companies are driving rents up in California while the D.C. area prepares for the arrival of its half of Amazon HQ2.

Industrial REITs, boosted by another year of heavy interest in the industrial market as e-commerce dominates, posted a decline in total returns to a negative 3.2 percent, according to Nareit.

The biggest industrial REIT, San Francisco-based Prologis, bet big on the industrial market in 2018, paying $8.5 billion to acquire DCT Industrial Trust, adding 71 million square feet to its already huge portfolio. The deal is the second-largest on record for mergers and acquisitions involving REITs.

Showing more weakness are office REITs, which fell 15 percent through Dec. 28, while shares of retail REITs slid 13 percent, according to Nareit.

Aside from standouts, such as Boston Properties Inc., which over the summer completed a $616 million deal for Santa Monica Business Park in Los Angeles, office REITs have struggled this year.

Office REIT performance often tracks with job growth, which has been strong across the United States. However, the office development boom that has occurred in many of the country’s growth markets, and in some coastal cities where office REITs are often concentrated, are either having or expecting weaker demand, creating a supply-demand imbalance, according to an analysis by Hoya Capital Real Estate, a Connecticut-based registered investment adviser.
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