The State of REITs: January 2025 Edition

Micro cap REITs (-8.63%) yet again underperformed their larger peers in December. Small caps (-5.98%) saw the least negative average total return followed by mid caps (-6.62%) and large caps (-7.43%). Over the course of the full year of 2024, large cap REITs outperformed small caps by 468 basis points.

0 out of 18 Property Types Yielded Positive Total Returns in December

100% of REIT property types averaged a negative total return in December. There was a narrow 8.94% total return spread between the best and worst-performing property types. Manufactured Housing (-3.18%) and Hotels (-3.28%) outperformed their REIT peers in December. Timber (-12.12%) and Self-Storage REITs (-9.29%) took the biggest hit in a tough final month of 2024.

The REIT sector as a whole saw the average P/FFO (2025Y) decrease 1.1 turns in December from 14.9x down to 13.8x. 100% of property types averaged multiple contraction. Land (32.7x), Data Centers (29.9x), Multifamily (20.1x), Manufactured Housing (19x) and Single Family Housing (18.3x) currently trade at the highest average multiples among REIT property types. Hotels (7.4x) and Office (9x) are the only property types that average single digit FFO multiples.

Performance of Individual Securities

Equity Commonwealth (EQC) (+18.93%) saw the highest total return of any REIT in December as it paid out a $19.00/share liquidating distribution. In July 2024, EQC had announced plans to liquidate all assets with a target completion date of Q2 2025. The December distribution accounted for the vast majority of liquidation proceeds and EQC plans to continue to wind down their operations and liquidate the last of their assets over upcoming months.

American Healthcare REIT (AHR) (+126.64%) and Power REIT (PW) (+104.71%) massively outperformed their REIT peers in 2024 with triple digit total returns. SL Green Realty (SLG) (+58.18%), Iron Mountain (IRM) (+54.48%) and Vornado Realty Trust (VNO) (+51.26%) rounded out the top 5 REITs of 2024.

Wheeler REIT (WHLR) (-57.93%) was the worst performing REIT again in December and finished 2024 down a crushing -98.47% from where it started the year. The only REIT that performed worse in 2024 was CorEnergy Infrastructure Trust (CORR.Q) (-100%) whose common shares were completely wiped out in bankruptcy.

Although only 9.68% of REITs had a positive total return in December, 55.63% managed to achieve a positive return for the full year. REITs averaged a +3.70% total return in 2024, which fell short of the +8.66% average return for the REIT sector in 2023.

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 12/31/2024) 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) narrowed slightly in December and investors are now paying on average about 27% more for each dollar of 2025 FFO/share to buy large cap REITs than small cap REITs (17.2x/13.5x – 1 = 27.4%). 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 (-4.71%) and mid cap REIT (-6.24%) trade at mid single-digit discounts to NAV. Small cap REITs (-22.44%) trade at a little over 3/4 of NAV and micro caps (-36.65%) trade at less than 2/3 of their respective NAVs.

​Bankruptcy filings decreased month-over-month in December. However, the number of bankruptcies in December 2024 increased from December 2023. In total, 2024 saw the most bankruptcies of any year since 2010.

10 REITs announced dividend raises in December, 7 of which pay quarterly dividends and 3 of which pay monthly. Whitestone REIT (WSR) (+9.1%), Invitation Homes (INVH) (+3.6%) and Mid-America Apartment Communities (MAA) (+3.1%) announced the largest dividend hikes. In total, 76 REITs announced increases to their dividend during 2024.

​The 4th quarter was rough for the REIT sector as it significantly underperformed the S&P 500. Malls were the only property type to outperform the S&P. Industrial and Self-storage REITs were hit the hardest in the Q4 REIT selloff with average total returns of -15.9% and -15.8% respectively.

​Innovative Industrial Properties (IIPR) saw the biggest collapse during Q4 with a brutal -49.1% total return. Diversified Healthcare Trust (DHC) (-44.9%) and Service Properties Trust (SVC) (-44.1%), both of which are externally managed by The RMR Group (RMR), similarly plummeted in Q4.

Although most REITs saw negative returns in 4Q, seven of them saw strong double-digit returns. Farmland Partners (FPI) led the sector with a stellar +24.8% return, followed by CBL Properties (CBL) (+18.2%), Sunstone Hotel Investors (SHO) (+15.6%), RLJ Lodging Trust (RLJ) (+12.9%), Retail Opportunities Investments Corp. (ROIC) (+11.3%), Digital Realty Trust (DLR) (+10.3%) and Macerich (MAC) (+10.2%).

REITs Enter 2025 With Low Default Risk, Favorable Interest Rate Tailwinds and Attractive Valuations Relative to the Broader Market

In an economy that has seen the number of bankruptcy filings increase in each of the past 2 years, REITs present a much lower risk than other industries. S&P Global Market Intelligence’s RiskGauge model found that no REIT property types were among the 10 US industries most vulnerable to default. In fact, REITs accounted for 6 of the 10 industries least vulnerable to default. Each REIT must of course be analyzed individually by investors since risks differ greatly from one company to another, but overall the sector currently presents a lower risk of default than most other industries.

​REITs are well positioned to outperform the broader market in 2025. The Fed is currently in a rate cutting cycle and each subsequent cut will grant REITs access to lower borrowing costs as well as make REIT yields more attractive against a declining risk-free rate. REIT FFO multiples also remain attractive at an average of only 13.8x at the close of 2024, expecially when compared to the historically high earnings multiples of many stocks in the S&P500 and NASDAQ. With low default risk, attractive multiples and the benefit of an interest rate tailwind, many REITs have the potential to achieve a strong total return in 2025.

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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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