REITs Are Staging a Slow-Mo Comeback

Offices are still the worst off, but there is even some good news in bedraggled malls.

Real estate investment trusts (REITs) are recovering, oh so gradually, but they at least are on the mend overall.

The category saw earnings growth slow to 2% in the year’s first quarter, but that seems to be on track with a recovery narrative. That comes after two consecutive quarters of double-digit growth in the latter half of last year.

For REITs as a whole, interest rate costs dipped and cash on hand rose, all good signs, according to a study from Nareit, the trade group for REITs. For the different segments of the market, the returns varied a lot.

“Different parts of the economy are reopening at different speeds, and REIT performance by property sector reflects this variation,” said Calvin Schnure, Nareit senior economist. “The recovery is broadening with the vaccine rollout, however, and prospects for improvement have gone from ‘if’ to ‘when.’”

The leaders in funds from operations (FFO), the REIT version of earnings, were data centers, up 15.8%, and industrial (mainly warehouses), rising 15.7%. In percentage terms, albeit from a low base, retail showed a big boost, with regional malls ahead 14.5%, as Americans got back to in-person shopping. They have recovered almost a third of their decline pre-pandemic.

FFO for lodging/resorts went from negative $521 million in 2020’s fourth quarter to minus $400 million in this year’s first quarter. And FFO for apartment REITs rose 2.9% after sliding the prior two quarters. Apartment FFO remained 6.2% below the year-ago period. Some who specialize in distressed real estate are snagging some of these properties.

The laggard: office buildings. FFO for offices fell 12.5% in the January-March period, and was 12.2% below the first quarter of 2020.

For investors, REITs have come back pretty well, all told. For the Vanguard REIT exchange-traded fund (ETF), which fell 13.6% from February 2020 (its all-time peak) to April 2020, the turnaround is stark. It has recovered its previous level and passed it.

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