REIT Performance
The REIT sector has had a rough start to 2024 with back-to-back months of negative total return. Equity REITs averaged a -0.81% total return in February and again underperformed the broader market. The NASDAQ (+6.2%), S&P 500 (+5.3%) and Dow Jones Industrial Average (+2.5%) all saw strong gains in February. The market cap weighted Vanguard Real Estate ETF (VNQ) outpaced the average REIT in February (+1.98% vs. -0.81%) and has seen smaller losses year to date (-3.18% vs. -6.33%). The spread between the 2024 FFO multiples of large cap REITs (16.8x) and small cap REITs (12.4x) widened in February as multiples expanded 0.6 turns for large caps and contracted 0.3 turns for small caps. Investors currently need to pay an average of 35.5% 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.
In February mid cap (+1.46%) and large cap REITs (+1.04%) averaged a positive total return, whereas their smaller REIT peers were in the red with micro caps (-6.98%) and small caps (-1.33%) underperforming. Large caps have outperformed small caps by 372 basis points after the first two months of 2024.
9 out of 18 Property Types Yielded Positive Total Returns in February
50% percent of REIT property types averaged a positive total return in February. There was a wide 21.06% total return spread between the best and worst performing property types. Data Centers (+9.54%) outperformed, led by Iron Mountain (IRM) which was the 2nd best performing REIT in February with a +16.47% total return.
Infrastructure (-11.52%) continued to severely underperform all other property types in February. The strong returns of Power REIT (PW) (+12.74%) and Uniti Group (UNIT) (+11.41%) were more than offset by the plummeting share price of CorEnergy Infrastructure Trust (OTCPK:CORRQ) (-89.91%).
Infrastructure (-11.52%) was the only REIT property type to average a double-digit negative return over the first two months of 2024. Data Centers (+9.54%) and Advertising (+9.14%) have led the REIT sector year to date.
The REIT sector as a whole saw the average P/FFO (2024Y) increase 0.1 turn in February from 12.8x up to 12.9x. 55.6% of property types averaged multiple expansion, 38.9% saw multiple contraction and 5.9% held a steady multiple. Land (38.7x), Data Centers (27.1x), Timber (19.9x), Single Family Housing (19.8x) and Manufactured Housing (19.3x) currently trade at the highest average multiples among REIT property types. Malls (6.1x), Office (7.9x) and Hotels (8.6x) all average single digit FFO multiples.
Performance of Individual Securities
Healthpeak Properties (PEAK) merged in an all-stock transaction with Physician’s Realty Trust (DOC) on March 1st. February 29th was the final trading day for Physician’s Realty Trust. Shareholders of Physicians Realty Trust received 0.674 shares of Healthpeak Properties for every share of DOC they held. The combined entity retains the Healthpeak Properties name, but now trades under the ticker symbol DOC.
Medical Properties Trust (MPW) (+36.81%) saw steady gains throughout February and built on those gains with a Q4 earnings beat on February 21st. Despite the strong February performance, MPW remains in the red thus far in 2024 with a -14.26% total return over the first two months of the year.
CorEnergy Infrastructure Trust (CORRQ) (-89.91%) announced on February 25th that they had filed for chapter 11 bankruptcy. The common stock will be cancelled. The equity in the reorganized CorEnergy Infrastructure Trust will be split between senior note holders (~89%) and preferred (OTCPK:CORLQ) shareholders (~11%) but will be “subject to dilution from the management incentive plan and adjustment based on final cash available upon emergence” as per CorEnergy’s press release. The share price of CORRQ collapsed on the announcement that common shareholders would receive nothing in the restructuring.
50.64% of REITs had a positive total return in February. During the first two months of 2023 the average REIT had a +4.93% return, whereas REITs kicked off the first two months of 2024 with a disappointing -6.33% total return.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
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 02/29/2024) to lowest dividend yield.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
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.
Valuation
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.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Takeaway
The large cap REIT premium (relative to small cap REITs) widened in February and investors are now paying on average about 35% more for each dollar of 2024 FFO/share to buy large cap REITs than small cap REITs (16.8x/12.4x - 1 = 35.5%). 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 (-3.90%) trades at a low single-digit discount to NAV. Mid cap REITs (-11.26%) trade at a low double-digit discount to NAV, while small cap REITs (-26.01%) trade at about 3/4 of NAV. Micro caps on average trade at less than half of their respective NAVs (-56.48%).
Bankruptcy filings increased month-over-month in February but have now decreased year-over-year in back-to-back months. As of the end of February, 2024 bankruptcy filings are down 21.3% compared to the same period of 2023. However, this figure is still 85% higher in 2024 than it was in the first two months of 2022 and 16.4% higher than the same period in 2021.
In Q4 2023, the majority of REITs beat FFO/share estimates. Hotels, Self-storage and Infrastructure (Communications) were the property types with the highest % of REITs beating the analyst consensus for FFO/share. Health Care and Residential (Multifamily, Manufactured Housing, and Single Family Housing) saw the smallest portion of REITs exceed consensus FFO/share.
Five hotel REITs beat earnings estimates by 10% or more, led by Pebblebrook Hotel Trust (PEB) and Chatham Lodging Trust (CLDT) with 40.0% and 26.7% beats respectively. Office accounted for 20% of the 15 biggest FFO/share misses in Q4 with SL Green Realty (SLG), Brandywine Realty Trust (BDN) and Hudson Pacific Properties (HPP) missing by 20.9%, 6.9% and 6.7% respectively.
24 REITs announced dividend hikes in February, 21 of which are quarterly dividends and 3 of which are monthly. Some of these REITs, such as EPR Properties (EPR) and Xenia Hotels & Resorts (XHR), had slashed their dividends during the government-imposed lockdowns and have not yet raised their dividends all the way back up to where they were at the end of 2019. However, many other REITs have significantly increased their dividend over that same time period. For example: American Homes 4 Rent (AMH), SBA Communications (SBAC) and Rexford Industrial Realty (REXR) have more than doubled their dividend since the end of 2019.
Despite the stickiness of some aspects of inflation and various headwinds in the economy, a large number or REITs continue to perform well fundamentally. The share price declines across much of the REIT sector since the end of 2021 have been primarily driven by multiple compression (18.8x --> 12.9x) rather than by reductions in FFO/share. This has created the opportunity to access FFO/share growth and dividend growth at significantly discounted prices, which creates the potential to achieve substantial alpha over upcoming years.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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