REITs Outperforming Russell 2000 and S&P 500

Moving forward, inflation puts the accuracy of forecasts and results at jeopardy.

The good news is that REITs as a group have recently performed well. They were up 4.2% as of last Friday, per BTIG Research. Comparatively, the S&P 500 and Russell 2000 stock indexes saw returns of 3.6% and 4.0%, respectively.

But then there was this line: “Rates are expected to be in focus again for REIT with strong inflation measures on tap for this week’s economic calendar (CPI prints on Tuesday, PPI prints on Wednesday).”
Additionally, Tuesday’s CPI prints, sometimes known as inflation data, fell far short of forecasts. Almost everything else was up, even if oil was down. Core inflation, which excludes food and energy, reached 6.3%, exceeding experts’ expectations by a factor of 2. Consumers suffered from the basics. Monthly growth in food was 0.8%. Shelter increased by 0.7% from month to month. August to July had a 0.5% increase in transportation.

When the Fed meets next week, the benchmark interest rate will likely rise by 75 basis points, with a potential increase of 1 percentage point.
According to a Nareit piece from early 2022, inflation is often advantageous for REITs. The company stated that “REITs have traditionally offered protection against inflation and outperformed the broader stock market during periods of moderate and high inflation,” where it defined moderate inflation as occurring between 2.5% and 7.0% and high inflation as occurring beyond 7.0%.

But there are also interest rates, which the Fed has aggressively raised in an effort to restrict economic growth and bring inflation back to about 2%.

According to BTIG’s analysis, “REITs as a sector have significantly cleaned up their balance sheets since the GFC.” However, in 2022, both the weighted average rate on REIT debt and the ratio of interest expense to NOI will be at historic lows. If rates continue to rise, which they will, this creates a danger to projections and results.

As a result of rates being so low for so long and seeing so many false starts, the company added, “We think there is a danger that interest expense has been rooted in consensus projections.” To put things in perspective, the current SOFR forward curve indicates an average rate of 3.84% in 2023, before taking into consideration any credit spreads. As a result, the weighted average rate for total REIT debt throughout the industry in 2023 will be higher than the average 1-month rate at present. Unhedged variable-rate balances will be impacted by this, and there may be volatility for external growth if buyers are compelled to reevaluate their financing assumptions.

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