The State of REITs: August 2024 Edition
- The REIT sector soared in July with an +8.33% average total return and is now in the black year to date with +3.83% thus far in 2024.
- Small cap (+9.91%) and mid cap REITs (+9.77%) averaged the highest total returns in July. Micro caps (+5.85%) and large caps (+5.53%) were also in the black in July albeit with more modest average returns.
- 84% of REIT securities had a positive total return in July.
- All 18 REIT property types averaged a positive total return in July. Infrastructure (+21.55%) led the REIT sector while Single Family Housing REIT (+0.67%) saw the smallest average gains.
- The average REIT NAV discount narrowed from -16.28% to -9.05% during July. The median NAV discount narrowed from -16.85% to -8.64%.
REIT Performance
The REIT sector recovery accelerated in July (+8.33%), expanding upon the gains in May (+2.51%) and June (+1.12%). In July, REITs handily outpaced the broader market, outperforming the Dow Jones Industrial Average (+4.5%), S&P 500 (+1.2%) and NASDAQ (-0.7%). The market cap weighted Vanguard Real Estate ETF (VNQ) saw slightly smaller gains than the average REIT in July (+7.94% vs. +8.33%), but it has outperformed year-to-date (+4.48% vs. +3.83%). The spread between the 2024 FFO multiples of large cap REITs (17.5x) and small cap REITs (13.7x) narrowed in July as multiples expanded 0.5 turns for large caps and 1.2 turns for small caps. Investors currently need to pay an average of 27.7% 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.
Small cap (+9.91%) and large cap REITs (9.77%) surged in July, followed by solid (albeit smaller) gains from micro caps (+5.85%) and large caps (+5.53%). Large caps have outperformed small caps by 165 basis points through the first seven months of 2024.
18 out of 18 Property Types Yielded Positive Total Returns in July
Every single REIT property type averaged a positive total return in July. There was a broad 20.88% total return spread between the best and worst performing property types. Infrastructure (+21.55%) was the top performing property type in July led by stellar returns from both Uniti Group (UNIT) (+31.51%) and Power REIT (PW) (+38.36%).
The worst performing property type in July was Single Family Housing (+0.67%) as both American Homes 4 Rent (AMH) (-2.88%) and Invitation Homes (INVH) (-1.73%) underperformed in a strong month for REITs.
Despite a stellar recovery in July, Infrastructure (-7.80%) has still underperformed all other REIT property types year-to-date. Timber (-7.50%) and Hotels (-6.74%) have similarly struggled in 2024. Data Centers (+20.31%) and Advertising (+18.26%) have led the REIT sector with the strongest average total returns over the first 7 months of 2024.
The REIT sector as a whole saw the average P/FFO (2024Y) increase 1.1 turns in July from 13.1x up to 14.2x. 88.9% of property types averaged multiple expansion, 5.6% saw multiple contraction and 5.6% had no change in average multiple. Land (28x), Data Centers (27.2x), Multifamily (20.7x), Manufactured Housing (20.2x) and Single Family Housing (19.7x) currently trade at the highest average multiples among REIT property types. Hotels (8.1x) Office (8.3x), and Malls (8.3x) are the only property types that average single digit FFO multiples.
Performance of Individual Securities
Cold storage REIT Lineage (LINE) began trading on July 25th in the largest IPO thus far this year. Lineage joins Americold Realty Trust (COLD) in the publicly traded cold storage REIT space.
A trio of micro caps led the REIT sector in July: Industrial Logistics Properties Trust (ILPT) (+39.96%), Braemar Hotels & Resorts (BHR) (+39.22%) and Power REIT (PW) (+38.36%). Power REIT is now the best performing REIT in 2024 (+91.63%) as it partially bounces back from a brutal -83.55% total return in 2023.
Wheeler REIT (WHRL) (-68.77%) continued its multi-year freefall in July as it badly underperformed all other REITs. After yet another dismal month, WHRL now has a horrific -99.33% total return over the past 12 months.
86.84% of REITs had a positive total return in July. During the first seven months of 2023, the average REIT had a +3.95% return. The REIT sector began the first seven months of 2024 with a nearly identical +3.83% 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 07/31/2024) 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 July and investors are now paying on average about 28% more for each dollar of 2024 FFO/share to buy large cap REITs than small cap REITs (17.5x/13.7x – 1 = 27.7%). 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 (+0.67%) and mid cap REIT (-0.33%) trade very close to NAV. Small cap REITs (-19.13%) trade at just over 4/5 of NAV and micro caps (-39.30%) on average trade at approximately 3/5 of their respective NAVs.
Bankruptcy filings declined in July to the lowest figure since February. The number of bankruptcies in the first seven months of 2024, however, remains slightly higher than over the same period last year. Despite the month-over-month decline, bankruptcies in July remain higher than any month of 2022 and higher than all but one month of 2021.
Many economists and business leaders are forecasting elevated odds of recession before the end of the year. Some REITs are better equipped than others to perform in a challenging economic climate and short sellers are positioning themselves where they believe there Is the greatest opportunity to capitalize on underperformance. Overall, during July the REIT sector saw average short interest increase by 5 basis points to 3.6%. The REIT property types with the highest short interest at the end of July are Office and Hotels. However, Farmland REITs saw the highest month-over-month increase (+42 bps) up to 4.8% at the end of July.
The REITs with the greatest increase in short interest during July were Wheeler REIT (+5.5%), Medical Properties Trust (MPW) (+3.8%) and Net Lease Office Properties Trust (NLOP) (+3.5%).
The REITs that saw the largest decrease in short interest during July were Office Properties Income Trust (OPI) (-5.0%), SL Green Realty Corp. (SLG) (-3.1%) and Ashford Hospitality Trust (-1.7%).
Six of the ten most shorted REITs are from the Office sector, including SL Green and Hudson Pacific Properties (HPP) with short interest of 16.6% and 16.0% respectively. Medical Properties Trust, however, is by far the most shorted equity REIT with a whopping 36.4% short interest and 14.3 days to cover.
Potential for REITs to Become a More Important Source for Yield
8 REITs announced dividend increases in July. The biggest July hike came from Medalist Diversified REIT (MDRR) with an increase of 25%. 7 of the raised dividends are paid quarterly and 1 paid monthly. In total, 53 REITs announced dividend hikes during the first seven months of 2024.
Dividend growth is always appealing, but will likely prove even more attractive relative to falling treasury yields as the Fed begins to cut rates. This could put upward pressure on REIT share prices if investors rotate into REITs in pursuit of yield. With REITs already attractively valued relative to the broader market, there is potential for solid outperformance over upcoming years.
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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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