REIT earnings are solid, but rate worries are holding prices down

Public REITs delivered an unusually strong second-quarter earnings season, but rate anxiety kept their shares roughly flat. Hoya Capital, a private investment advisory firm that tracks the space, compiled data from more than 200 U.S. REITs and homebuilders: 83% raised full-year funds-from-operation guidance, while just 4% cut it. The firm described the period as one of the cleanest in recent memory, citing broad guidance raises and few outright disappointments.

Office results led the property-level surprises. National leasing volume climbed 16% year over year to 62.4 million square feet, buoyed by strong quarters from SL Green Realty and BXP. Retail occupancy has nearly returned to pre-pandemic levels. Industrial rode the data-center development wave, and hospitality also posted an impressive showing.

Listed shares did not follow. From July 12 through Aug. 11, the Equity REIT Index fell 0.7%, while the S&P 500 gained nearly 4%. The REIT index is still up 11.6% on the year, but that trails the S&P 500's 13.6% advance. David Auerbach, Hoya's chief investment officer, attributes the divergence to higher-for-longer rates and fading investor confidence.

For allocators and lenders, the report separates two stories. Property-level fundamentals — office leasing, retail occupancy, data-center demand — are firming across sectors. Listed valuations still reflect the rate environment: net-asset-value discounts and balance-sheet concerns that, Hoya notes, have dominated the narrative for years. Auerbach says REITs have adapted by raising capital, pursuing M&A, and selling portfolios. With more than four in five companies raising guidance, the cash-flow picture now looks more reliable than the share-price reaction implies.