REIT returns were modestly higher in April as valuation levels, first quarter earnings reports and mergers and acquisitions (M&A) activity lifted investor sentiment.
The total returns of the FTSE Nareit All REITs Index rose 0.6 percent in April, while the S&P 500 rose 0.4 percent. The total returns of the FTSE Nareit Mortgage REIT Index gained 0.4 percent in April.
The yield on the 10-year Treasury note rose 0.2 percent in April.
Nick Yulico, executive director at UBS Investment Research, noted that the recent uptick for REITs reflects a couple of factors—REITs generally benefit when the broader market isn’t doing as well, and REIT valuations are at their “most attractive level” since the financial crisis.
Meanwhile, Matt Werner, portfolio manager at Chilton Capital Management, noted that first quarter earnings generally came in above expectations.
“I’m pleasantly surprised that earnings and M&A seems to have been driving stocks…we’ve needed some M&A activity,” Werner said. “Luckily right now, investors don’t seem to be as worried about interest rates as they were a month or even two months ago,” he added.
Werner said he is hopeful REIT management teams will have more confidence to raise their guidance going forward, given that the economy is improving and higher interest rates don’t appear to be impacting cap rates.
Despite recent gains in the REIT sector, Yulico also noted that fund flows remain an issue. “Fund flows have been meaningfully negative year-to-date,” he said.
At the same time, Yulico observed that interest from generalist investors has “picked up a little bit,” mostly notably from value-oriented investors who view REITs as undervalued versus the broader market.
Turning to individual segments of the REIT market, industrial REIT returns gained 4.8 percent in April. “Industrial is getting all the love right now, and rightfully so,” Werner said.
Yulico pointed out that investors are focusing more on short-term lease sectors, including lodging. Lodging REIT returns rose 4.0 percent last month. Werner noted that many lodging REITs had set guidance quite conservatively at the end of the previous quarter. “I think we’ll get some more guidance raises there,” he said.
Timberland REITs, meanwhile, also posted a strong month in April, with returns of 4.7 percent.