The State of REITs: January 2023 Edition
- The REIT sector ended a brutal 2022 on a low note with a -7.72% total return in December.
- Large cap (-4.89%), mid cap (-6.03%) and small cap (-8.21%) REITs all averaged single-digit declines in December, but micro caps (-15.21%) fell much more sharply.
- Only 8.02% of REIT securities had a positive total return in December. 13.14% were in the black for the full year 2022.
- Casino (-1.89%) and Triple Net (-2.02%) outperformed all other REIT property types in December. Mall (-20.52%), Infrastructure (-17.48%) and Office (-10.86%) REITs were the worst performers averaging double-digit declines.
- The average REIT NAV discount widened from -19.60% to -23.62% during December. The median NAV discount also widened from -17.94% to -21.51%.
After experiencing some recovery in October and November, REITs fell sharply in December (-7.72%), closing the year out with a -23.56% full-year total return. In December the REIT sector underperformed the Dow Jones Industrial Average (-4.09%) and S&P 500 (-5.76%), but outperformed the NASDAQ (-8.7%). Full year 2022 relative performance was similar as the REIT sector underperformed the Dow Jones Industrial Average (-6.9%) and S&P 500 (-18.1%), but didn’t suffer nearly as severe of a decline as the NASDAQ (-32.5%). The market cap weighted Vanguard Real Estate ETF (VNQ) had a better total return than the average REIT in December (-5.03% vs. -7.72%), but still underperformed by 268 basis points over the course of 2022. (-26.24% vs. -23.56%). The spread between the 2023 FFO multiples of large cap REITs (16.6x) and small cap REITs (11.3x) narrowed slightly in December as multiples contracted by 0.9 turns for large caps and 0.8 turns for small caps. Investors currently need to pay an average of 46.9% more for each dollar of FFO from large cap REITs relative to small cap REITs. In this monthly publication, I will provide REIT data on numerous metrics to help readers identify which property types and individual securities currently offer the best opportunities to achieve their investment goals.
0 out of 18 Property Types Yielded Positive Total Returns in December
100% percent of REIT property types averaged a negative total return in December, with an 18.63% total return spread between the best and worst performing property types. Malls (-20.52%), Infrastructure (-17.48%), and Office (-10.86%) saw double-digit declines.
Casino (-1.89%) and Triple Net (-2.02%) REITs achieved the smallest declines in December. Casino REITs did not just outpace their REIT peers in December, but also significantly outperformed throughout 2022. Gaming and Leisure Properties (GLPI) ended the year with a +13.48% full year total return and VICI Properties (VICI) was similarly successful with a +13.05% return. There was a 3rd Casino REIT at the start of the year, MGM Growth Properties (MGP), which was acquired by VICI back in April. MGP was also in the black in 2022 with a +3.31% total return.
Performance of Individual Securities
Braemar Hotels & Resorts (BHR) (+12.74%) was the only REIT to achieve a total return greater than +4% in December. BHR has severely underperformed over the past decade but delivered a lot of good news in December that fueled a strong total return in a brutal month for REITs. In December BHR increased their dividend by 400% (from $0.01/share to $0.05/share), announced the authorization of a share buyback program of up to $25M, reported November 2022 RevPAR that is about 15% higher than November 2019 RevPAR and closed on a new $100M mortgage which will be used to pay off higher interest rate debt.
Pennsylvania REIT (PRET) closed the year out with the worst performance in both November (-38.38%) and December (-52.54%) as the extremely levered Mall REIT continues to achieve short-term extensions of debt maturities from lenders but has struggled to actually improve their balance sheet in any meaningful way. There is growing concern that they will not be able to prevent a 2nd bankruptcy. Despite this dismal performance to close out the year, PRET had a marginally less terrible 2022 total return (-92.35%) than Power REIT (PW) (-94.27%).
Only 8.02% of REITs had a positive total return in December with 13.14% in the black for full year 2022. In 2021 the average REIT had a remarkable +39.65% return, whereas in 2022 the average REIT had a brutal -23.56% total return.
Dividend yield is an important component of a REIT’s total return. The particularly high dividend yields of the REIT sector are, for many investors, the primary reason for investment in this sector. As many REITs are currently trading at share prices well below their NAV, yields are currently quite high for many REITs within the sector. Although a particularly high yield for a REIT may sometimes reflect a disproportionately high risk, there exist opportunities in some cases to capitalize on dividend yields that are sufficiently attractive to justify the underlying risks of the investment. I have included below a table ranking equity REITs from highest dividend yield (as of 12/31/2022) to lowest dividend yield.
REIT Premium/Discount to NAV by Property Type
Below is a downloadable data table, which ranks REITs within each property type from the largest discount to the largest premium to NAV. The consensus NAV used for this table is the average of analyst NAV estimates for each REIT. Both the NAV and the share price will change over time, so I will continue to include this table in upcoming issues of The State of REITs with updated consensus NAV estimates for each REIT for which such an estimate is available.
The large cap REIT premium (relative to small cap REITs) widened slightly in December and investors are now paying on average about 47% more for each dollar of 2023 FFO/share to buy large cap REITs than small cap REITs (16.6x/11.3x – 1 = 46.9%). As can be seen in the table below, there is presently a strong positive correlation between market cap and FFO multiple.
Investors should not just look at a REIT’s balance sheet, but also look at their tenant mix to identify potential risks. Lease structure also varies and should be examined as well. While it is always important to understand who a REIT’s tenants are, conducting that level of due diligence before making an investment can be particularly helpful heading into a period that may see elevated bankruptcies and other tenant challenges. Carefully researched investment in well-managed REITs with strong balance sheets and healthy tenants can help prevent costly surprises in the future.
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Through October 2021, The State of REITs was published exclusively on Seeking Alpha by Simon Bowler, Sector Analyst at 2nd Market Capital Services Corporation (2MCSC). Editions subsequent to October 2021 will be published on this website in addition to other platforms that may include Seeking Alpha. 2MCSC was formed in 1989 and provides investment research and consulting services to the financial services industry and the financial media. 2MCSC does not provide investment advice. 2MCSC is a separate entity but related under common ownership to 2nd Market Capital Advisory (2MCAC), a Wisconsin registered investment advisor. Simon Bowler is an investment advisor representative of 2MCAC. Any positive comments made by others should not be construed as an endorsement of the author's abilities to act as an investment advisor.
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