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Ahead of GICS change, a review of REIT outperformance


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Ahead of GICS change, a review of REIT outperformance

Realestate industry observers in recent months have made a sport out of callingmarket peak, but the present cycle appears to have entered extra innings.

REITsbounced back significantly from their February lows to outperform the S&P 500by a healthy margin in the first half, according to SNL data. Year-to-datethrough July 18, the SNL U.S. REIT Equity index returned 16.0%, while theS&P 500 returned 7.3%. The 10-year U.S. T-note saw its yield fall30.0% over the same period.

REITstend to outperform in low-interest rate environments and when the economy is onthe up-and-up, but this cycle has witnessed a rare confluence of additionalREIT market drivers, according to Bruce Garrison, senior portfolio manager ofChilton Capital Management's REIT strategy.

"Wehave postulated from 2008 that it was going to be one for the record books inits length," Garrison said of the current real estate cycle, "and westill abide by that prognostication."

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Inan interview, Garrison reeled off a list of factors working in REITs favor: healthy,low-leverage balance sheets; an influx of foreign capital looking to invest inU.S. real estate; a broader flight to asset quality and safety; an unusuallylong stretch of unusually low interest rates; and a supply picture that, incontrast to previous cycles, has remained in check.

Garrisonsaid the upcoming carve-out of real estate from financials in theinfluential Global Industry Classification Standard, or GICS, will bolster REIToutperformance. Some financials-focused funds may off-load REITs as a result ofthe classification change, but on balance, there will be a substantial inflowof capital to the space.

"We'veseen studies that, if you take all the '40 Act funds and bring those funds upto the market weight where they should be, post-GICS, then there's ahypothetical net buying power of over $100 billion," Garrison said."So the positives more than outweigh the negatives."

TheGICS change likely already is behind some of REITs' outperformanceyear-to-date, he added.

"Mostinvestors in stocks have been underweight REITs forever," Garrison said. "Ithink the tide is going out on those guys, and it's going to show how badlyunderinvested they are. And I bet they're starting to add to their holdings,and it's probably helped considerably in the last couple of months."

TheSNL U.S. REIT Equity index, notably, has outperformed the 10-year Treasury noteand the S&P 500 over the past 10 years. The SNL U.S. REIT Equity index hadan average annual total return of 10.3% from 2006 to 2015, compared to anaverage annual total return of 9.1% for the S&P 500 and a 0.4% averageannual change in yield for the 10-year Treasury note.

Between2000 and 2015, the average annual total return for the SNL U.S. REIT Equityindex was 14.3%, compared to 5.8% for the S&P 500 and negative 1.7% for the10-year Treasury note yield.

The 10-yearTreasury note outperformed the U.S. REIT Equity index only four of the last 16years. The S&P 500 outperformed the U.S. REIT Equity index in just two ofthe last 16 years — in 2007 and 2013.

SpecialtyREITs had the most top 25 performers over the past 10 years, at seven.Equinix Inc., a datacenter company that converted to a REIT on Jan. 1, 2015, led all REITs withan 803.5% 10-year total return as of July 18. Equinix averaged a 33.7% annualtotal return from 2006 to 2015.

HealthcareREITs had the second-highest number of top performers, with six companies inthe top 25. National HealthInvestors Inc. led healthcare REITs with a 10-year total return of495.6% as of July 18. National Health Investors had an 18% average annualreturn from 2006 to 2015.

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Use SNL's Global Real Estate Total Return Template  to calculate and graph total return for all SNL covered publicly traded real estate companies and indices over a specified time range. Other templates are available in the Excel Template Library.