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Portfolio > Alternative Investments > Private Equity

Mortgage REITs Topped US REIT Market in 2017

By Michael S. Fischer

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Mortgage REITs delivered a 19.8% total return for 2017, the top performance of the overall U.S. REIT market, Nareit reported this week.

Among mREITs, the home financing segment had a 23.3% total return last year, while the commercial financing segment gained 9.1%.

The FTSE Nareit All REITs Index, which comprises mREITs and equity REITs, delivered a total return of 9.3% for the year with a 2.4% gain for the fourth quarter. The S&P 500’s total return for 2017 was 21.8%, with a gain of 6.6% in the October-to-December quarter.

Nareit president and chief executive Steven Wechsler said in a statement that the total U.S. REIT market’s 2017 performance, as measured by the FTSE Nareit All REITs Index’s total return, was representative of the market’s long-term performance.

“Since the beginning of 1972, when the index was created, its average annual return has been 9.72%,” Wechsler said. “Over the longer term, REITs have been a remarkably consistent investment, delivering solid long-term performance and consistent income for their shareholders.”

Wechsler noted that the broader equity market’s performance was driven by large-cap growth stocks in 2017 — primarily companies in the information technology industry, with the S&P 500 Information Technology Sector returning 38.8%.

Equity REIT Property Segments Shine

The FTSE Nareit All Equity REITs Index’s total return last year was 8.7%, with a 2.5% gain in the fourth quarter. About half of all equity REIT market segments had double-digit total returns in 2017, it said.

The infrastructure sector, whose largest companies are cell phone tower REITs, led the equity REIT market’s performance with a 35.4% total return for the year. It was followed by:

  • Data centers with a 28.43% return
  • Manufactured home communities with a 21.9% gain
  • Timber REITs with 21.9%
  • Industrial REITs with 20.6%
  • Single-family home REITs with 17.5%
  • Specialty REITs with 13.2%

Four trends are driving equity REIT valuations, according to one portfolio manager.

Nareit’s report showed that REITs continued to offer strong dividend yields for income investors in 2017. The home financing segment of the mREITs index had a dividend yield of 10.6% at year-end, while the commercial financing segment’s yield was 7.7%.

Among equity REITs, property segments with yields at year-end exceeding the 3.9% yield of the FTSE Nareit All Equity REITs Index included specialty REITs, with a 6.2% yield, lodging/resorts, 6%, and healthcare, 5.8%

By way of comparison, the S&P 500 Index’s at year-end dividend yield was 1.9%.

Nareit reported that REITs raised a record $92 billion in equity and debt in the public capital markets last year, 20% more than the $77 billion raised in 2013, the industry’s next most active year for capital raising.

Equity raised in 2017 included $2.9 billion in nine IPOs, $27.5 billion in secondary offerings of common shares and $11 billion in preferred shares. REITs also raised a record $50.8 billion in unsecured debt in 2017, surpassing the 2016 record of $37.3 billion.

The report said REITs used the proceeds from the bond offerings mainly to replace debt issued earlier. It said the industry’s debt ratio (total debt divided by total market capitalization) fell to 31.7% at the end of 2017 from 32.1% a year earlier.

Real estate shares listed globally, including REITs, also advanced in 2017, with the FTSE EPRA/Nareit Global Real Estate Index delivering a 15% total return, calculated in U.S. dollars. The index’s 477 companies have a combined equity market capitalization of $1.7 trillion, approximately 72% of which is from REITs.

The index’s European segment led last year’s performance with a 28.8% total return, trailed slightly by the Asia/Pacific segment with 26.8% total return. The index’s Middle East/Africa segment delivered an 18.5% return, and the Americas segment gained 4.9%.

— Check out It’s Time to Talk About Alternative Assets on ThinkAdvisor.

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