The State of REITs: November 2024 Edition

Only 3 out of 18 Property Types Yielded Positive Total Returns in October

Only 22.2% of REIT property types averaged a positive total return in October. There was a 14.60% total return spread between the best and worst performing property types. Data Centers (+5.52%) was the top performing property type in October as all three data center REITs achieved positive total returns in October despite declines across most of the REIT sector. Digital Realty Trust (DLR) (+10.13%) led, followed by Iron Mountain (IRM) (+4.12%) and Equinix (EQIX) (+2.30%).

Self Storage (-9.08%) averaged the worst total return of any property type in October. All 5 Self Storage REITs were in the red with National Storage Affiliates Trust (NSA) (-12.55%) seeing the sharpest decline.

Performance of Individual Securities

Power REIT (PW) (+45.95%) outpaced all other equity REITs in October and now has the 5th highest total return year to date (+69.31%). The only REITs that have achieved even stronger returns in 2024 are American Healthcare REIT (AHR) (+110.27%), Iron Mountain (IRM) (+80.68%), SL Green Realty (SLG) (+74.87%) and Strawberry Fields REIT (STRW) (+70.44%).

Service Properties Trust (SVC) (-29.62%) was the worst performing REIT in October. The share price fell sharply after SVC announced plans to sell off approximately half of their hotel portfolio and cut the quarterly dividend to only $0.01/share. The disposition proceeds and savings from a reduced dividend will be used to reduce debt and improve liquidity.

Only 27.10% of REITs had a positive total return in October. During the first ten months of 2023, REITs averaged a double-digit negative return (-10.46%). The REIT sector has performed far better over the first ten months of 2024, however, with a +6.48% 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 10/31/2024) 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.

Takeaway

The large cap REIT premium (relative to small cap REITs) widened yet again in October and investors are now paying on average about 42% more for each dollar of 2024 FFO/share to buy large cap REITs than small cap REITs (19.5x/13.7x – 1 = 42.3%). As can be seen in the table below, there is presently a strong positive correlation between market cap and FFO multiple.

REIT Fundamentals Remain Strong with Both Occupancy and SS-NOI Growth Improving in Q3

The REIT sector saw median same-store occupancy rise from 93.7% in Q2 2024 to 94.1% in the Q3 2024. Median same-store NOI growth also accelerated slightly from 2.6% in Q2 to 2.7% in Q3. These positive property level trends demonstrate that the REIT sector remains resilient despite weakness in the overall economy.

Q3 median same-store NOI growth was strongest for Health Care REITs (+7.6%), Industrial (+5.4%), and Shopping Centers (+4.1%). The laggards were Self-Storage (-2.5%), Office (-0.8%), and Mall REITs (-0.1%), which each struggled with negative median same-store NOI growth during the 3rd quarter.

There were 6 REITs with incredibly strong double-digit same-store NOI growth in the third quarter. American Healthcare REIT (AHR) led all REITs with a remarkable 17.0% year-over-year SS-NOI growth, followed by Diversified Healthcare Trust (DHC) (+16.1%), American Assets Trust (AAT) (+15.8%), Welltower (WELL) (+12.6%), Empire State Realty Trust (ESRT) (+12.5%) and Gladstone Commercial (GOOD) (+10.4%).

Despite solid growth for the REIT sector as a whole, growth for some REITs has turned negative, particularly among Office, Self-Storage, and Diversified REITs. Creative Media & Community Trust (CMCT) saw a particularly devastating collapse with a brutal -35.5% SS-NOI growth in Q3.

While ETFs are certainly a simple and straightforward way to invest, buying a REIT ETF means not only taking ownership in the many high growth REITs with strong fundamentals but also in those that are poorly managed and struggling operationally. It is very important to always remember that alpha is generated not just through investment into good opportunities, but also through the avoidance of poor investments. Carefully researched investment into individual REIT securities has the potential to achieve strong alpha with targeted investment into REITs with better management, stronger growth, and/or more attractive valuations.

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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

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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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