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What Happens to REITs When It is a Bad Quarter for Bonds?

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Overall, Equity REIT returns were relatively flat in the 3rd quarter of 2018 as the yield on the 10-year rose just over 20 bps in the quarter, ending at 3.05% from 2.84% at the start of the quarter. That is according to a recent REIT Quantitative Analysis from analyst firm BTIG.

Meanwhile, returns in the broader market were more positive with the S&P 500 posting total returns of 7.2%. As of the end of quarter, REIT total returns YTD stood at 2.3% vs. 10.6% for the S&P 500 and 11.5% for the Russell 2000. As the company has previously noted, when it’s a bad quarter for bonds, REITs tend to underperform the broader market materially.
With interest rates continuing to rise in the early days of the 4th quarter, it is difficult to make a positive case for the sector overall, explains BTIG, but the firm remains more positive on the outlook for the more cyclical sectors.

While the pro-cyclical sectors have done relatively well YTD (as they should with rising interest rates), the market has also been kind to select Health Care and Triple Net names, says BTIG. “But clearly, investors have found persistent excess returns if they were able to identify companies likely to deliver positive estimate revisions. The correlation between positive revisions and excess returns has steadily increased since the start of the year.”