The recent drop in equities, which was prompted by the possibility of an imminent interest rate hike, might help us explain certain rallies among REIT stocks. Just as some group of stocks went up over the course of a year, they dropped just as quickly, losing a significant portion of that appreciation. Net lease retail REITs have been one of the most affected groups.
After the Federal Reserve announced in its April meeting minutes that it was open to an interest rate hike in June, financial markets quickly reacted and the S&P 500 dropped slightly. Overall, REIT stocks have seen even steeper falls. However, some REIT sectors have reacted even more dramatically.
For instance, the net lease retail REITs, which have been the darlings of the market, plummeted by an average of 4% in the middle of last week. O and NNN dropped north of 5%. While they did manage to gain some ground by the end of the week, both stocks were still down by 6%. During their April meeting, the Fed decided to maintain the target range for interest rates at ¼ to ½ percent.
The recent fall only serves to reinforce how highly hyped the net lease retail REIT rally has been. For dividend investors, net lease REITs have been a source of high interest. Advantages include a lower operating leverage (tenant covers most, if not all, of the real estate expenses) and the availability of long paying dividend stocks. The lack of a clear change in fundamentals has raised questions about how sustainable this rally is.
On the other hand, data center REITs, which have been our best REIT sector this year, haven’t had the same reaction. Although there was a slight drop, it was not nearly as significant as the one felt by net lease REITs. An explanation can be found in the strong fundamentals, particularly the increasing need to store digital information has served as a catalyst to the industry.
Another noticeable drop occurred in the low productivity mall REITs, which have been affected by prior negative news on the retail space. While low productivity mall REITs have fallen an average of 7%, they closed the week down by almost 5%. This group includes CBL & Associates, WP Glimcher, and PREIT. High productivity mall REITs have fared much better, falling an average of less than 2%.
Source: Realty Income Corporation(NYSE:O),National Retail Properties, In(NYSE:NNN)
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