REITs Return Big as Investors Pour In

Even as the stock market soars into record territory, real estate investment trusts (REITs) are shooting past it. U.S. REIT returns were more than three times those of the broader equity market in April, according to a new report from NAREIT, the REIT industry association. REITs have also outperformed the market in the first four months of this year.

"The REITs are direct beneficiaries of Ben Bernanke and his fellow global central bankers who are all following the same QE/currency debasement playbook," said Alexander Goldfarb, of Sandler O'Neill. "Investors continue to scramble for total return, and that pressure is pushing up prices and thus compressing yield. REITs offer earnings and dividend growth as well as inflation protection."

Institutional investors are especially drawn to REITs because they provide not just earnings growth, but strong dividend growth. REITs are required to distribute at least 90 percent of taxable income to shareholders in the form of dividends. Also, real estate is relatively inexpensive right now.

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"Physical real estate is attracting institutional investors because there is a positive spread between how much it costs to finance real estate versus the income generated," added Goldfarb.

On a total return basis, the FTSE NAREIT All REITs Index gained 5.80 percent in April and the FTSE NAREIT All Equity REITs Index gained 6.33 percent, while the S&P 500 was up 1.93 percent.

While almost all sectors of U.S. REITs have delivered double-digit gains year-to-date, some are outshining others. Health care was the industry's top-performing major sector, with a 23.77 percent total return, according to the NAREIT report. Lodging was up 17.51 percent, and retail was up 17.34 percent, led by shopping centers.

An improving economy is clearly sending consumers back on vacation and back to the malls. Health care has been a consistent leader, as Baby Boomers fuel the aging population.

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A product of the real estate recovery, Mortgage REITs were up nearly 19 percent and Home Financing REITs were up over 17 percent. Commercial financing is driving much of the former, but these sectors are benefitting from a potential thaw in mortgage credit in residential as well.

"There are signs that conditions are beginning to loosen," according to analysts at Capital Economics, who also noted that mortgage demand is on the rise.

Meanwhile, mortgage delinquencies are falling — at least delinquencies on newer loans. As of February, 2014, mortgages originated before 2009 make up 50 percent of all outstanding mortgages, but 86 percent of all mortgage delinquencies, according to a new report from TransUnion. Both the improvement in credit outstanding and credit availability will benefit the corresponding REITs.

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The dividend yield of the FTSE NAREIT Mortgage REITs Index was 10.79 percent, with Home Financing REITs yielding 11.82 percent. The S&P 500's dividend yield was 2.12 percent, according to the NAREIT report.

Apartment REITs, however, are underperforming their peers, despite still strong rental demand, rent growth and low vacancies. Some analysts say that may be a mistake on the part of investors who think housing is rebounding far faster than it really is, or who are worried that there is too much multi-family construction coming on line. Apartment REITs, they say, are still a good buy.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

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