The State of REITs: May 2024 Edition

REIT Performance

April was a tough month in the stock market and REITs were not spared from the downturn. Equity REITs averaged a -4.27% total return in April, which was largely in line with the broader market. REITs outperformed the Dow Jones Industrial Average (-4.9%) and NASDAQ (-4.4%) but fell short of the S&P 500 (-4.1%). The market cap weighted Vanguard Real Estate ETF (VNQ) saw deeper declines than the average REIT in April (-7.94% vs. -4.27%) and has underperformed year-to-date (-9.12% vs. -7.65%). The spread between the 2024 FFO multiples of large cap REITs (15.8x) and small cap REITs (12.2x) narrowed in April as multiples contracted 1.1 turns for large caps and 0.3 turns for small caps. Investors currently need to pay an average of 29.5% 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.

Micro cap (-2.71%) and small cap REITs (-2.87%) outperformed in April. Large caps (-5.99%) and mid caps (-5.36%) finished the month deeper in the red than their smaller peers. Small caps have outperformed large caps by 64 basis points through the first third of 2024.

3 out of 18 Property Types Yielded Positive Total Returns in April

Only 17% percent of REIT property types averaged a positive total return in April. There was a 17.6% total return spread between the best and worst performing property types. Multifamily (+3.73%) outpaced all other property types in April, led by Apartment Income REIT (AIRC) (+18.20%) which spiked upon the announcement that it had agreed to be acquired by Blackstone.

Timber (-13.89%) was the worst performing property type in April with all 3 Timber REITs enduring double-digit declines; Weyerhaeuser (WY) (-15.98%) saw the sharpest drop, followed closely by PotlatchDeltic (PCH) (-14.9%) and Rayonier (RYN) (-10.77%).

Infrastructure (-31.08%) and Land (-15.23%) have averaged the worst performance year-to-date. Advertising (+13.10%), Single Family Housing (+7.2%), Multifamily (+2.7%), Data Centers (1.47%), and Malls (+0.03%) are the only property types in the black over the first 4 months of 2024.

The REIT sector as a whole saw the average P/FFO (2024Y) decrease 0.6 turns in April from 13.4x down to 12.8x. 5.6% of property types averaged multiple expansion, 88.9% saw multiple contraction and 5.6% held a steady multiple. Land (28.3x), Data Centers (23.5x), Single Family Housing (19.5x), Manufactured Housing (17.7x), and Multifamily (17.6x) currently trade at the highest average multiples among REIT property types. Malls (7.4x), Office (8.0x), and Hotels (9.3x) are the only property types that average single-digit FFO multiples.

Performance of Individual Securities

Pennsylvania REIT (PRETQ) (+3.87%) was delisted after the final trading date of April 1st. PREIT finished with a 2024 total return of +19.57% after a dismal performance in recent years.

CorEnergy Infrastructure Trust (CORRQ) (+98.02%) nearly doubled in April amid high volatility. However, the year-to-date return for CORRQ remains -94.29% and the common stock will still be wiped out in Chapter 11 bankruptcy.

After modestly outperforming on total return in Q1, Power REIT (PW) (-40.78%) resumed its multi-year downtrend in April. April’s sharp share price decline pushed the year-to-date total return of PW down to a brutal -30.72%. April’s share price collapse was fueled by the “substantial doubt as to its ability to continue as a going concern” language in their annual report published after hours on March 29th.

Only 21.29% of REITs had a positive total return in April. During the first four months of 2023, the average REIT had a -4.13% return. The REIT sector began the first four months of 2024 with a nearly identical -4.27% total return.

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Dividend Yield

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 04/30/2024) to lowest dividend yield.

Although a REIT’s decision regarding whether to pay a quarterly dividend or a monthly dividend does not reflect on the quality of the company’s fundamentals or operations, a monthly dividend allows for a smoother cash flow to the investor. Below is a list of equity REITs that pay monthly dividends ranked from highest yield to lowest 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.

Takeaway

The large cap REIT premium (relative to small cap REITs) narrowed in April and investors are now paying on average about 30% more for each dollar of 2024 FFO/share to buy large cap REITs than small cap REITs (15.8 x/12.2x – 1 = 29.5%). As can be seen in the table below, there is presently a strong positive correlation between market cap and FFO multiple.

The table below shows the average NAV premium/discount of REITs of each market cap bucket. This data, much like the data for price/FFO, shows a strong, positive correlation between market cap and Price/NAV. The average large cap REIT (-10.07%) and mid cap REIT (-12.44%) trade at low double-digit discounts to NAV. Small cap REITs (-25.99%) trade at just under 3/4 of NAV and micro caps on average trade at less than half of their respective NAVs (-52.83%).

Bankruptcy filings increased month-over-month for the 3rd month in a row in April. There were 34.7% more bankruptcy filings in April 2024 than in April 2023. Year-to-date bankruptcies are down from the same period last year but are higher than in the first 4 months of any year from 2013-2022.

5 REITs announced dividend increases in April and 1 REIT announced a dividend reinstatement. 4 of the raises are quarterly and 2 of them are monthly. In total, 39 REITs have announced dividend hikes during the first 4 months of 2024. The dividend reinstatement was from Medalist Diversified REIT (MDRR), which declared a $0.02/share dividend. This is the first common dividend declared for MDRR since the dividend suspension in 2020.

An analysis by S&P Global determined that 61% of publicly traded equity REITs with a market cap greater than $200M posted earnings beats for Q1 2024. The property types that saw the greatest share of beats were Retail (78.3%) and Office (75%). Self-storage (25%) and Industrial (27.3%) saw only a small portion of REITs outperform expectations.

Half of the top 10 FFO/share beats came from Hotel REITs led by Pebblebrook Hotel Trust (PEB) (+40%) and Summit Hotel Properties (INN) (+26.3%). Other notable beats came from Farmland Partners (FPI) (+500%), Alexander & Baldwin (ALEX) (+53.8%) SL Green (SLG) (+40.8%), and Simon Property Group (SPG) (+26.2%).

8 different property types were represented among the 10 largest FFO share misses The largest FFO/share miss came from small cap hotel REIT Service Properties Trust (SVC) which fell short of analyst FFO expectations by a whopping -31.6%. The 2nd biggest miss came from large cap communications REIT SBA Communications (SBAC) which posted Q1 FFO/share that was 19.6% below consensus.

The huge disparity of fundamental performance across property types and between individual REITs within each property type demonstrates the importance of both asset allocation and stock selection when investing in the REIT sector. Although REIT ETFs provide exposure to well managed REITs with great balance sheets, they unfortunately also provide similar exposure to poorly managed REITs with troubled balance sheets. This is due to ETFs indiscriminately providing exposure to a large pool of REITs regardless of their quality. Alternatively, active management can facilitate more targeted investment into REITs that have more attractive valuations, better management, and stronger fundamentals.

Important Notes and Disclosure

All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.

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Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

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.

S&P disclosure:   S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P.