The State of REITs: July 2024 Edition
- The REIT sector continued to recover in June with a +1.12% average total return but closed out the first half of the year in the red (-3.86%).
- Micro cap REITs (-3.79%) averaged a negative total return in June, but small caps (+1.01%), mid caps (+2.29%), and large caps (+2.88%) finished in the black.
- 58% of REIT securities had a positive total return in June.
- 13 out of 18 REIT property types averaged a positive total return in June. Self-Storage (+6.98%) led the REIT sector again in June while Infrastructure REITs (-13.44%) badly underperformed.
- The average REIT NAV discount narrowed from -17.50% to -16.28% during June. The median NAV discount narrowed from -17.08% to -16.85%.
REIT Performance
The REIT sector saw smaller gains in June (+1.12%) than in May (+2.51%) but continued to bounce back from a rough start to the year. These back-to-back gains, however, were not enough to pull REITs back into positive territory in 2024 as they finished the first half of the year with a -3.86% average total return. In June, REITs fell short of the Dow Jones Industrial Average (+1.2%), S&P 500 (+3.6%) and NASDAQ (+6.0%). The market cap weighted Vanguard Real Estate ETF (VNQ) saw slightly bigger gains than the average REIT in June (+1.87% vs. +1.12%) and has narrowly outperformed year-to-date (-3.21% vs. -3.86%). The spread between the 2024 FFO multiples of large cap REITs (17x) and small cap REITs (12.5x) widened in June as multiples expanded 0.4 turns for large caps but only 0.1 turns for small caps. Investors currently need to pay an average of 36.0% 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.
13 out of 18 Property Types Yielded Positive Total Returns in June
72.2% percent of REIT property types averaged a positive total return in June. There was a wide 20.42% total return spread between the best and worst performing property types. Self Storage (+6.98%) was the top performing property type again in June, led by a double-digit gain from National Storage Affiliates Trust (NSA) (+14.23%).
The worst performing property type in June was Infrastructure (-13.44%), due to the common shares of CorEnergy Infrastructure Trust (CORRQ) (-100.00%) getting completely wiped out in bankruptcy.
Performance of Individual Securities
Apartment Income REIT (AIRC) was acquired by Blackstone (BX) on June 28th. It was an all-cash transaction in which AIRC shareholders received $39.12/share.
Wheeler REIT (WHLR) (+57.66%) had the highest total return in June, clawing back a small portion of their brutal share price decline over the first 5 months of the year (-73.10%). Even after the June recovery, WHLR trades 57.58% lower than where it started the year. WHLR was the 3rd worst performing REIT over the first half of 2024.
CorEnergy Infrastructure Trust (CORRQ) (-100.00%) was the worst performing REIT in June as the common shares were completely wiped out in bankruptcy. The cancelation of the CORRQ shares was effective June 12th.
65.58% of REITs had a positive total return in June. During the first half of 2023, the average REIT had a +0.46% return. The REIT sector began the first half of 2024, however, with a disappointing -3.86% average 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 06/30/2024) 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) widened in June and investors are now paying on average about 36% more for each dollar of 2024 FFO/share to buy large cap REITs than small cap REITs (17x/12.5x – 1 = 36.0%). 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 (-4.39%) and mid cap REIT (-8.03%) trade at single-digit discounts to NAV. Small cap REITs (-25.60%) trade at just under 3/4 of NAV and micro caps on average trade at approximately half of their respective NAVs (-49.04%).
Bankruptcy filings in June rose higher and exceeded even the elevated levels seen in 2020 during the government-imposed lockdowns. There were more bankruptcies in the first half of 2024 than in the first half of any year since 2010. Prolonged high interest rates and a lengthy period of elevated inflation have increasingly taken a toll on the economy. Bankruptcy filings may remain elevated through the remainder of 2024 even if the Fed starts the rate cutting cycle in September given that cuts are likely to only occur 25 bps at a time, which may not be sufficient for some struggling companies to stay financially solvent.
Although the difficult economic climate and elevated borrowing costs are fueling an upward trend in bankruptcies in the US, the degree of default risk among publicly traded companies varies greatly by industry. The GICS sectors that S&P Global Market Intelligence has identified to have the greatest risk of default are Energy, Communication Services, and Consumer Discretionary. In both the first and second quarter of 2024, Real Estate has been identified as the sector with the lowest default risk.
When broken down further by industry, the most at risk are Publishing, Oil and Gas Equipment and Services and Apparel Retail. 6 of the 10 industries with the lowest risk of default are REITS. Single-Family Residential REITS, Retail REITs, Healthcare REITs, Industrial REITs, Telecom Tower REITs, and Self-Storage REITs were found to have a disproportionately low default risk.
6 REITs announced dividend increases in June. 5 of the raised dividends are paid quarterly and 1 paid monthly. In total, 48 REITs announced dividend hikes during the first half of 2024. The biggest June hike came from Industrial REIT Innovative Industrial Properties (IIPR) with an increase of 4.4%.
The REIT sector is trading at a far more attractive valuation than most of the broader market and has a lower default risk. Additionally, many REITs are continuing to grow earnings and raise the dividend. This presents a remarkable opportunity for outperformance as REIT’s fundamental strength and attractive valuations provide an appealing option for those looking to rotate out of overpriced sectors of the market. This opportunity will be magnified by any rate cuts from the Fed as it will provide investors with better yield than treasuries.
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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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