Along with other equities, publicly-traded REIT stocks suffered a rough first half of 2022, but that picture began to change in July with the FTSE Nareit All Equity REITs index rising 8.6 percent. Entering the month, REIT total returns were down nearly 20 percent for the year, but July helped claw back some of that drop, leaving the index down 12.3 percent.
REITs have been bolstered by a strong second quarter earnings season, with many REIT executives reporting continued strong operating fundamentals. And investors have now largely priced in the effects of the Fed’s monetary policy.
WMRE sat down with John Worth, Nareit executive vice president for research and investor outreach, to discuss the latest results and where REITs stand when it comes to ESG initiatives and reporting.
This Q&A has been edited for length, style and clarity.
WMRE: What were the highlights from the monthly numbers?
John Worth: It was the best month for REIT returns since December 2020, when we were in the vaccine rally. The index posted total returns of 8.6 percent, with REITs now down a little over 12 percent for the year. So REITs are slightly outperforming the S&P 500 and outperforming the Russell 1000 by 100 basis points. The results also broke a streak of three consecutive months in the red and may be a turning point in market perceptions generally. I think you can make a case that near-term monetary policy is now fully priced in.
In addition, REITs are up 9 percent since the beginning of second quarter earnings season. We are about halfway through earnings and the improvement in the index reflects the strong tenor of earnings that we have heard so far.
WMRE: Was the bounce back broad-based across all property types or were there some differences?
John Worth: The numbers were positive across the board, but the best performing sector was lodging/resort REITs, which were up 14.4 percent for the month. That puts lodging/resort REITs year-to-date at just negative 4 percent. So that sector was the strongest in July and the best on a year-to-date basis. There is continuing strength in leisure travel, but also the view that business travel is in the midst of recovering.
Industrial REIT total returns were also up 11.6 percent for the month. Industrial has been one of the hardest hit sectors this year. After this month, they are still the second worst sector year-to-date behind office, but it was a strong month. Another strong performer was retail, up 11.4 percent in July.
The two weakest categories were data centers and infrastructure, reflecting concerns about demand for those sectors even though we have seen strong earnings reports in both of those sectors.
WMRE: Aside from the total return numbers, are there any themes you observed in the month or in what REITs are reporting during earnings calls?
John Worth: The key theme is this strength across the board. With industrial it’s a rebound month. Retail, which has not been performing poorly this year, showed continued strength. And the sector that really jumps out again, is lodging/resorts. It’s a real and long-awaited recovery for that sector. But the meta theme that I take away from the entire sector is that we are still seeing this disconnect between stock market returns and operating performance.
We had very strong operating performance in the first quarter and so far in this earnings season we are seeing that strength continued. Of companies that have reported, 81 percent reported year-over-year growth in FFO and more than 85 percent reported year-over-year growth in NOI. There is an underlying strength in operations and REITs are showing the ability to grow income in a period of high inflation.
WMRE: There is talk in the commercial real estate industry more widely about deals being repriced and a slowdown in investment sales activity until the bid/ask gap is resolved. But in the past we’ve also talked about REIT balance sheets positioning them to be buyers in this sort of environment compared to investors who rely on high levels of leverage. What are you hearing?
John Worth: The slowdown in transactions has impacted REITs along with all other market participants. Where we are likely to see REITs jump in is that they tend to be the first back into the market after a slowdown. We are waiting to see how that slowdown occurs and waiting for that new equilibrium in pricing to emerge.
One of things we are watching carefully in our T-Tracker is what is happening with REIT transactions. A sense of what I’m hearing, but it’s not quantitative yet, is that there is more transaction activity than I would have expected. We have to wait to see if that shows up in the data or not. My expectation is certainly that acquisitions and dispositions will slow in second quarter data overall, but we are hearing more discussion of completed transactions than I would have expected given the overall market conditions.
WMRE: Last month Nareit also released its annual industry ESG report. What were some of the highlights of that?
John Worth: The report does a good job conveying the big picture of how the REITs are meeting their goals in all three of the E, S and G categories. The piece of that report that is the most interesting are the case studies in the back. You get a sense of the variety and breadth of ESG activities, but also the depth to which REITs are investing in ESG. It is impressive to me.
We also put out a piece with more of an investor focus as part of my teams’ midyear review and outlook. What they do in this piece is try to measure ESG quantitatively from a couple of different perspectives. They put together data on REITs’ disclosure activity and showed that the amount of REITs disclosing carbon targets and sustainability goals has doubled since 2018. More than 60 percent are reporting those.
The piece also takes a step back and gauges REIT participation in GRESB (Global Real Estate Sustainability Benchmark). They found that REITs are very competitive with private real estate and generally outperform in terms of their GRESB scores. They also looked at seasoned REITs vs. new REITs and over time REITs have outperformed in terms of their GRESB scores. It’s quite interesting.
In the last section, the piece looks at how REITs perform in stock market-based objectives of ESG. They compete with private real estate, but also to have to compete with MSCI, FTSE, Refinitiv—the alphabet soup of stock market-based ESG objectives. REITs are improving both their raw scores and their rankings in terms of these stock market-based measures.