REIT Performance
The REIT sector had a challenging start to 2022, with a -5.66% total return in January. While this underperformed the S&P 500 (-5.26%) and the Dow Jones Industrial Average (-3.32%), it was still better than the NASDAQ (-8.98%). The Vanguard Real Estate ETF (VNQ) also experienced negative performance in January (-8.42%). Large cap REITs saw their FFO multiples decrease by 2.1 turns, while small cap REITs only saw a decrease of 1 turn. In this article, we will analyze various metrics to help identify the best investment opportunities in the REIT market.
Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article.
Micro cap (-1.65%) and small cap (-5.47%) REITs outperformed their larger peers in January, while mid caps (-5.87%) and large caps (-7.20%) faced heavy losses. This marked a significant reversal from 2021, where large caps dominated and micro caps lagged behind. So far in 2022, small cap REITs have outperformed their larger counterparts by 173 basis points.
0 out of 19 Property Types Yielded Positive Total Returns in January
In January, all REIT property types experienced negative total returns, with land (-12.25%) and manufactured housing (-11.45%) REITs having the worst average total returns. The market saw a selloff due to investor concerns over multiple Fed rate hikes in 2022. The top 5 property types with the highest FFO multiples at the start of the year were also the worst-performing property types in January. However, health care (-0.71%) and hotel (-0.77%) REITs managed to perform relatively well, as they already had lower valuations compared to other property types.
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article.
The average P/FFO (2022) for the REIT sector declined by 1.4 turns in January, with the FFO multiples rising for 0% and declining for 100% of property types. Land (35.6x) and industrial (28.5x) REITs maintained higher average multiples compared to other property types. Mall (8.1x) REITs were the only property type trading at a single-digit multiple.
Performance of Individual Securities
HMG/Courtland Properties delisted in January as part of a liquidation announced in December. American Finance Trust also rebranded as Necessity Retail REIT (RTL) in February. InnSuites Hospitality Trust (IHT) experienced significant share price volatility, bouncing back from a -27.33% total return in December. Innovative Industrial Properties (IIPR) saw its valuation decline due to investor concerns over aggressive Fed rate hikes. Despite the January selloff, IIPR still has the highest NAV premium (+68.27%) among all REITs.
In January, only 12.57% of REITs had a positive return, compared to 3.16% in the same period last year. The average REIT has seen a disappointing -5.66% return so far in 2022.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Dividend Yield
Dividend yield plays a significant role in a REIT's total return. Many investors are attracted to the high dividend yields offered by REITs. Currently, as many REITs are trading below their NAV, the yields are quite attractive. While a high dividend yield may indicate higher risks, it also presents opportunities for investors to capitalize on attractive yields that justify the inherent risks of the investment.
Below is a table ranking equity REITs from the highest to lowest dividend yield as of January 31, 2022.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
In addition, here is a list of equity REITs that pay monthly dividends ranked from highest to lowest yield.
Valuation
REIT Premium/Discount to NAV by Property Type
The table below ranks REITs within each property type based on their premium or discount to NAV. The consensus NAV used in this table is the average of analyst estimates for each REIT. As both the NAV and share price change over time, updated consensus NAV estimates will be provided in future editions of The State of REITs.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Takeaway
The premium of large cap REITs over small cap REITs narrowed in January, but the average FFO/share for large cap REITs is still 41% higher than for small caps. Market cap and FFO multiple have a strong positive correlation. The valuation data also shows that large cap REITs trade at a single-digit premium to NAV, while small cap REITs trade at a double-digit discount. Short interest in the REIT sector increased in January, with malls being the most heavily shorted property type. However, it is important to note that high short interest does not necessarily indicate a bad investment. Some REITs are raising their dividends in 2022, driven by strong fundamentals and improving earnings. Investors should carefully consider the bear case before taking any positions.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.