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What January’s REIT Results Tell Us About the State of the Market

Across the various subsectors, REITs remain on the trajectories that began in the fourth quarter of 2021 as the industry looks to a post-COVID-19 recovery.

This is the first of what will be a monthly feature where WMRE sits down with the experts from Nareit to get a first look at breaking down the previous month’s REIT returns.This is the first of what will be a monthly feature where WMRE sits down with the experts from Nareit to get a first look at breaking down the previous month’s REIT returns.

A tumultuous month that saw a transfer of power in Washington unlike any other in the nation’s history, both encouraging and concerning developments in containing the COVID-19 pandemic and a late month stock market frenzy spurred on by Reddit traders was a whirlwind to follow, but REITs as a whole ended the month almost exactly where they started it. The FTSE Nareit All Equity REITs index ended January with total returns down a scant 0.07 percent year-to-date.

There were some property sectors with bigger moves. Retail REITs, fueled by an 11.62 percent rise in total returns for mall REITs, posted an increase in total returns of 2.8 percent. Data center REITs were also up 3.39 percent. Lodging/resort REITs, meanwhile, were down 5.16 percent, fueled largely by concerns that the pace of vaccinations might delay the sector’s recovery a bit longer than some had expected a few months prior.

WMRE sat down with Nareit EVP and economist John Worth to discuss REIT returns in the just-completed month and factors impacting performance of the REIT industry and its various sectors.

This transcript has been edited for style and clarity.

WMRE: What were some of the broad takeaways from the first month of 2021 for the REIT sector?

John Worth: You have to look at January performance in the context of what happened in 2020 as a whole and particularly the fourth quarter.

What we saw throughout 2020 was that there was a very wide dispersion in terms of the performance of sectors. … That dispersion was driven by whether sectors were negatively impacted by social distancing or got tailwinds.

On the negative side were retail, healthcare and, most significantly, lodging and resorts. There was some spillover into office and multifamily, particularly as some questions on the future of work-from-home emerged.

In the fourth quarter, we saw a turnaround for the hardest hit sectors.

For lodging REITs, total returns ended the year down about 23 percent. But they were down 50 percent at one point and had rebounded back up in the fourth quarter.

Retail REITs also came into the end of the third quarter down 39 percent year-to-date. Then they had gains of 23 percent for the quarter to end the year down 25 percent.

The key was that the hardest hit sectors for the first three quarters had significant rebounds driven by vaccine optimism.

WMRE: So how did that narrative play out for January?

John Worth: Broad brush, REITs basically didn’t change. We did see broad swings during the month due to political uncertainty and COVID-19 uncertainty. And some of the large gainers during the fourth quarter had declines in January, giving back some of those fourth quarter gains.

Office REITs were down about 3 percent. Healthcare [REITs] were down 3 percent. Lodging/hospitality [REITs] were down more than 5 percent. So, there was a little bit of a retrenchment of some of the optimism we saw in the fourth quarter.

There is some growing understanding that the rollout of vaccines will take time and there is an emerging risk with new variants. All of that tempered enthusiasm somewhat.

WMRE: Are there any takeaways for the rest of the year based on what we saw in the month?

John Worth: Data centers, cellphone towers and industrial and logistics did particularly well in 2020 and they have secular tailwinds behind them. As society digitizes and we see more growth of e-commerce, those sectors are well-positioned to take advantage of these long-term trends.

Apart from that, as we get into the second half of 2021 and we see life start to return more to normal with the availability of broad-based vaccines, we will see people respond to that by going back to a lifestyle that is more similar to their pre COVID-19 lifestyle than some analysts are suggesting. That means getting back to stores and restaurants, traveling for work and leisure and getting back to the office.

When I look at trends around the world where COVID-19 case rates have gone down or where they have stayed down the whole time, people are engaging in all of those activities. They are going to conferences and traveling. These sectors will see real recovery in operating performance and growth in demand. It feels very distant now, but looking globally, it gives you a sense of how quickly we can snap back to normal once people feel comfortable.

WMRE: Are there any other themes that stand out right now?

John Worth: When we look at dividend yields, the FTSE Nareit all equity dividend is 3.55 percent. That is more than double the S&P 500 dividend yield. So, for investors thinking about income strategies, high dividend stocks can be a part of that.

Early in the pandemic we saw dividends paused or cut in some of the hardest hit sectors. Since then, we’ve seen a reinstatement of dividends or had some REITs bring them back up. More broadly, given where share prices are, you’re still getting a good dividend yield (even in cases where dividends haven’t been brought back up.)

WMRE: And what about the whole Game Stop rally? A couple of REITs got briefly swept up in that.

John Worth: There were a couple of mall REITs, but they were pretty low market cap ones. And the ones that did get caught up account for less than 0.5 percent of total REIT industry market capitalization. So, it wasn’t driving industry results. It was just a side thing.

Retail in all was up by 2.8 percent driven by mall REITs being up 11.6 percent. A little bit of that was the Game Stop enthusiasm, but more broadly it was an understanding that there are opportunities in the sector when we see people eventually return to shopping.


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