MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
Summary
Following the year 2015 when more than 30 US REITs produced total return at the extremes -- i.e., either up or down more than 20% -- we looked back over a 20-year history to investigate how REITs tend to perform in successive years. The question: Do investors reallocate away from strong results, or pivot into stocks that underperformed the previous year, when the calendar year changes? The answer is not as much as one might think. Said differently, strong 2015 performance by a stock may not be reason to sell it in 2016.
Key Points
Our Process: To investigate how the change to the calendar year influences REIT stock performance, we first established four "Performance Groups" as follows: annual total return worse than negative 20% (Performance Group 1); annual total return between -20% and zero (Performance Group 2); annual total return between zero and +20% (Performance Group 3); and annual total return greater than positive 20% (Performance Group 4). Then, based on how a REIT stock performed in sequential years, we identified 16 "Change Buckets". So for example, if a REIT produced a negative 23% return in Year 1 and a positive 27% return in Year 2, that would fall into Change Bucket 1-->4. We performed this exercise for every US REIT as long as we had sufficient data, and aggregated up the analysis for each company, property sector and the US REIT industry overall.
The Result: Possibly the most relevant conclusion from this effort is at the overall US REIT industry level. We found that good or great stock performance (i.e., Performance Groups 3 and 4) has led to a subsequent year of good or great performance 43% of the time. Maybe not a huge surprise given the generally good relative performance of the REITs in a low interest rate environment. But while profit-taking and/or a search for upside from out- of-favor stocks may be a reasonable thesis when the year turns, the analysis suggests that strategy may not be the most fruitful. Below, we provide the key observations from both the stock and property sector perspective as well.
Try It Yourself! We created an Excel-based tool with a convenient interface to perform your own analysis. In Exhibits 16 and 17 at the end of the report, we provide a snapshot of the tool's appearance, which immediately populates multiple charts with a simple input of a stock ticker or property sector. Contact us or any MSUSA rep: The live version is available upon request.
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