The State of REITs: December 2024 Edition

Micro cap REITs (-0.81%) continue to lag their larger peers as November marked yet another month in the red. Small caps (+4.19%), mid caps (+3.70%) and large caps (+3.39%) all averaged strong November gains. Over the first 11 months of 2024, large cap REITs have outperformed small caps by 698 basis points.

15 out of 18 Property Types Yielded Positive Total Returns in November

83.3% of REIT property types averaged a positive total return in November. There was a 16.66% total return spread between the best and worst-performing property types. Malls (+13.78%) was the top performing property type in November, led by double-digit gains from CBL Properties (CBL) (+18.35%) and Macerich (MAC) (+14.42%) while Simon Property Group (SPG) also turned in a strong +8.56% return.

Industrial (-2.88%), Diversified (-0.63%), and Health Care (-0.57%) were the only property types in negative territory in November.

The REIT sector as a whole saw the average P/FFO (2025Y) increase 0.5 turns in November from 14.4x up to 14.9x. 72.2% of property types averaged multiple expansion, 22.2% saw multiple contraction and 5.6% saw multiples remain flat. Land (35.8x), Data Centers (33.1x), Multifamily (21.7x), Single Family Housing (20.5x) and Manufactured Housing (19.7x) currently trade at the highest average multiples among REIT property types. Hotels (7.6x) and Office (9.7x) are the only property types that average single-digit FFO multiples.

Performance of Individual Securities

Braemar Hotels & Resorts (BHR) (+25.87%) was the best-performing REIT in November and has the 8th highest total return year-to-date (+52.91%). Despite posting a slight year-over-year decline in RevPAR (-1.6%), Braemar shares spiked higher after releasing Q3 earnings on November 7th.

Wheeler REIT (WHLR) (-51.63%) continued to freefall as the share price declined almost every single trading day in November. Wheeler is now down -96.35% in 2024 as it continues to extend a multi-year streak of severe underperformance.

74.19% of REITs had a positive total return in November. During the first eleven months of 2023, REITs averaged a modestly negative return (-2.27%). The REIT sector has performed significantly better over the first 11 months of 2024 with a +10.45% average total return.

.

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 11/30/2024) 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) narrowed in November and investors are now paying on average about 29% more for each dollar of 2025 FFO/share to buy large cap REITs than small cap REITs (18.6x/14.4x – 1 = 29.2%). 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 (+4.19%) and mid cap REIT (+2.37%) trade at low single-digit premiums to NAV. Small cap REITs (-16.50%) trade at a double-digit NAV discount and micro caps (-31.65%) trade at just over 2/3 of their respective NAVs.

Bankruptcy filings increased month-over-month again in November and more than doubled from November 2023. 2024 has had more bankruptcies YTD than there were in the first 11 months of any other year since 2010.

10 REITs announced dividend hikes in November, 9 of which pay quarterly dividends and 1 of which pays monthly. Veris Residential (VRE) (+14.3%) and Strawberry Fields REIT (STRW) (+7.7%) had the largest dividend increases. In total, 71 REITs have announced increases to their dividend during the first eleven months of 2024.

With many REITs seeing a strong rebound in share price over the first three quarters of the year, this presented an opportunity for them to issue additional shares at accretive pricing. REITs leaned heavily into their at-the-market (ATM) programs to accomplish this. Equity REIT ATM usage spiked to a new high in Q3 2024.

Although ATM programs were utilized to raise capital across many property types, the most proceeds were raised in Q3 by Health Care ($4.65B) and Data Center ($1.78B) REITs.

In fact, the 5 largest issuances via ATM in Q3 were all from Healthcare and Data Center REITs. Welltower (WELL) had the largest with $1.25B, followed by Equinix (EQIX) with $976M and Digital Realty Trust (DLR) with $806M.

Fed Forecast Shifts Toward Fewer Rate Cuts and Higher Longer-Run Fed Funds Rate

The median longer-run fed funds rate forecast from the Federal Open Market Committee (FOMC) has been revised upward to 3.0%. This marks the highest projected longer-run fed funds rate since 2018.

FOMC end-of-year rate forecasts were also raised for both 2025 and 2026. This updated forecast amounts to only 50 bps of rate cuts in each of the next 2 years with the fed funds rate only coming down 100 bps by the end of 2026.

Any revisions to Fed rate forecasts typically elicit a material shift in REIT sector pricing. This is because of the fact that REITs are widely regarded by the market as a rate-sensitive sector due to the impact interest rates have on REIT cap rates and cost of capital. Cap rate compression produces rising REIT valuations. Falling interest rates provide REITs with access to cheaper debt which can create opportunities for favorable refinancing terms that reduce interest expense. Although the actual pace of cuts over upcoming years is yet to be seen, it is highly probable that interest rates will continue to trend downward, which will provide a strong tailwind for REIT cash flows and valuations going forward.

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.

We cannot determine whether the content of any article or recommendation is appropriate for any specific person. Readers should contact their financial professional to discuss the suitability of any of the strategies or holdings before implementation in their portfolio. Research and information are provided for informational purposes only and are not intended for trading purposes. NEVER make an investment decision based solely on the information provided in our articles.

We may hold, purchase, or sell positions in securities mentioned in our articles and will not disclose this information to subscribers, nor the time the positions in the securities were acquired. We may liquidate shares in profiled companies at any time without notice. We may also take positions inconsistent with the information and views expressed on our website.

We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to our clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

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.