The State Of REITs: January 2024 Edition

Image by syahrir maulana REIT Performance The REIT sector ended the year on a high note, with December showing an even better performance than November. In December, the average REIT total return surpassed that of...

Book about REIT - Real Estate Investment Trust isolated on wooden table. Image by syahrir maulana

REIT Performance

The REIT sector ended the year on a high note, with December showing an even better performance than November. In December, the average REIT total return surpassed that of the broader market, with more than double the return of major indices such as the NASDAQ, Dow Jones Industrial Average, and S&P 500. While the market cap weighted Vanguard Real Estate ETF (VNQ) fell slightly short of the average REIT return in December, it outperformed year-to-date. This monthly publication aims to provide REIT data on various metrics to help readers identify the best investment opportunities.

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 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

In December, small cap and mid cap REITs outperformed their larger counterparts, with double-digit total returns. For the full year of 2023, small caps narrowly outpaced mid caps and large caps. However, micro caps had a challenging year, falling significantly short of the average REIT performance. Small caps outperformed large caps by 138 basis points in 2023.

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 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

17 out of 18 Property Types Yielded Positive Total Returns in December

In December, 94.4% of REIT property types recorded a positive total return. Malls emerged as the top-performing property type, with a total return of 34.96%. However, the infrastructure property type was the only one in the red, dragged down by the poor performance of CorEnergy Infrastructure Trust (OTC:CORR). Despite this, other infrastructure-related REITs managed to post positive returns.

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 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

In 2023, infrastructure and land were the only property types with negative total returns. Office and triple net properties narrowly finished the year in the black. However, the number of REIT property types with positive total returns increased significantly in December, offering more opportunities for investors. Health care and data centers were the best performing property types in 2023.

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 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 REIT sector as a whole saw an increase in the average P/FFO (2024Y) in December, indicating multiple expansion. Land, data centers, timber, single-family housing, industrial, and manufactured housing currently trade at the highest average multiples among REIT property types. On the other hand, malls, hotels, and office properties average single-digit FFO multiples.

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 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

Performance of Individual Securities

In January 2024, RPT Realty (RPT) was acquired by Kimco (KIM) in an all-stock transaction, resulting in the cancellation of RPT shares. Pennsylvania REIT (PRET) experienced a sharp spike in December following the announcement that shareholders would receive a portion of a $10 million payment despite the company's bankruptcy. Diversified Healthcare Trust (DHC) emerged as the second-best performing REIT in December and achieved an extraordinary total return of +497.63% in 2023.

CorEnergy Infrastructure Trust (OTC:CORR) faced challenges in December, leading to a sharp decline in their stock price. However, 90.79% of REITs had a positive total return in December, with 66.25% in the black year-to-date. The REIT sector, on average, finished 2023 with a positive total return of +8.66%.

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 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

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 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

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 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

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 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

Dividend Yield

Dividend yield plays a significant role in a REIT's total return. The REIT sector is known for its high dividend yields, attracting many investors. Currently, many REITs are trading at share prices below their net asset value (NAV), resulting in attractive yields. While higher yields may sometimes indicate higher risk, careful analysis can uncover investment opportunities that justify the associated risks. The tables below rank equity REITs based on their dividend yields.

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 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

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 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

Although a REIT's decision to pay quarterly or monthly dividends does not reflect its fundamentals or operations, monthly dividends provide a smoother cash flow for investors. Below is a list of equity REITs that pay monthly dividends, ranked by their yield.

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 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

Valuation

REIT Premium/Discount to NAV by Property Type

Understanding a REIT's premium or discount to its net asset value (NAV) can provide insight into its valuation. The table below ranks REITs within each property type based on their premium or discount to NAV. This data, which includes consensus NAV estimates, can help investors make informed decisions.

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 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

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 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

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 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

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 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

Takeaway

The premium of large cap REITs over small cap REITs narrowed in December, indicating that investors are now paying approximately 28% more for each dollar of 2024 FFO/share to buy large cap REITs. The correlation between market cap and FFO multiple is evident, with larger REITs trading at higher multiples. Understanding market fundamentals and individual REIT portfolios is crucial for achieving significant returns. It is important to analyze both overall trends and specific markets to uncover the best investment opportunities.

S&P Global Market Intelligence S&P Global Market Intelligence

The rising number of bankruptcy filings and the increasing office vacancy rate pose challenges for the REIT sector. 2023 saw the highest number of bankruptcy filings since 2010, surpassing even the levels seen during the government-imposed lockdowns in 2020. Additionally, the office vacancy rate reached a new record high in Q4 2023. It is crucial to monitor these trends and assess individual markets and REITs to make informed investment decisions.

Source: Graphic from Wall Street Journal. Data from Moody’s Analytics Source: Graphic from Wall Street Journal. Data from Moody’s Analytics

While the national office vacancy rate increased, some markets bucked the trend and showed improvement. It is important to identify these markets and evaluate REIT portfolios based on their exposure to these specific markets. By conducting thorough research and analysis, investors can generate significant returns. However, it is crucial to note that this article discusses securities that do not trade on major U.S. exchanges. Please be aware of the risks associated with these stocks.

Source: Moody’s Analytics Source: Moody’s Analytics

Despite the challenges in the market, with sound investment research and due diligence, investors can navigate the REIT sector and identify opportunities that align with their investment goals. Understanding market dynamics and individual REIT performance is key to achieving success in this sector.

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