REIT Performance
The REIT sector’s strong performance in November and December to close out 2023 did not continue into January. Equity REITs averaged a -5.72% total return over the first month of 2024, badly underperforming the broader market as the NASDAQ (+1.0%), Dow Jones Industrial Average (+1.3%) and S&P 500 (+1.7%) all finished the month in the black. The market cap weighted Vanguard Real Estate ETF (VNQ) slightly outperformed the average REIT in January (-5.06% vs. -5.72%). The spread between the 2023 FFO multiples of large cap REITs (17.0x) and small cap REITs (12.7x) narrowed again in January, as multiples contracted 0.8 turns for large caps and 0.6 turns for small caps. Investors currently need to pay an average of 27.6% 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 January, large cap (-4.79%) and mid cap REITs (-4.82%) outperformed their smaller peers with smaller negative average total returns. Micro caps (-8.39%) and small caps (-5.98%) underperformed at the start of the year. Large caps outperformed small caps by 129 basis points after the first month of 2024.
Only 2 out of 18 Property Types Yielded Positive Total Returns in January
88.89% percent of REIT property types averaged a negative total return in January. There was a 14.74% total return spread between the best and worst performing property types. Malls (+3.14%) were the top performing property type for the 2nd month in a row, followed Data Centers (+1.29%). All other property types averaged a negative total return.
Infrastructure (-11.59%) was again the worst performing property type in January, as the share price of CorEnergy Infrastructure Trust (CORR) (-22.69%) continued to plummet. Infrastructure REITs SBA Communications Corporation (SBAC) (-11.76%) and Power REIT (PW) (-10.73%) also saw double-digit negative total returns in the first month of the year.
The REIT sector as a whole saw the average P/FFO (2024Y) decrease 0.9 turns in January from 13.7x down to 12.8x. 5.6% of property types averaged multiple expansion and 94.4% saw multiple contraction. Land (37.7x), Data Centers (25.2x), Single Family Housing (18.8x) and Manufactured Housing (18.8x) currently trade at the highest average multiples among REIT property types. Malls (6.7x), Office (8.0x) and Hotels (8.1x) all average single digit FFO multiples.
Performance of Individual Securities
Spirit Realty Capital (SRC) was acquired by Realty Income (O) on January 23rd in an all-stock transaction. Spirit Realty Capital shareholders received 0.762 shares of O for each share of SRC held. SRC’s preferred shares now trade under the ticker symbol (O.PR).
Pennsylvania REIT (OTC:PRETQ) (+17.33%) was the top performing REIT for the 2nd month in a row as it continued to rise due to the expected proceeds to common and preferred shareholders in PREIT’s bankruptcy. Although PREIT has had back-to-back months with very strong returns, it has performed terribly over a longer time period, including a -60.68% total return in 2023.
Office Properties Income Trust (OPI) (-49.72%) cut the quarterly common dividend from $0.25/share to $0.01/share on January 11th and the share price plummeted on the news. This -96% dividend reduction followed a -54.5% cut in April 2023 from $0.55/share to $0.25/share.
Only 9.55% of REITs had a positive total return in January. During January 2023, the average REIT had a strong +11.77% return, whereas REITs had a much rougher start to 2024 with a -5.72% 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 01/31/2024) 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) narrowed slightly in January 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 (16.2x/12.7x - 1 = 27.6%). 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 (-5.58%) trades at a single-digit discount to NAV. Mid cap REITs (-11.62%) trade at a double-digit discount to NAV, while small cap REITs (-23.99%) trade at about 3/4 of NAV. Micro caps on average trade at less than half of their respective NAVs (-54.72%).
In January, the pace of bankruptcy filings decelerated and snapped the 15-month streak of year-over-year increases in filings. It is worth closely watching data over upcoming months to determine whether the upward trend in bankruptcies has truly begun to reverse or whether January’s drop was merely an abnormal data point among a continued uptrend.
Looking specifically at retail bankruptcies, there were twice as many in 2023 as there were in 2022. However, 2023 still saw fewer retail bankruptcies than any year from 2015-2020. There were only 2 bankruptcies in January and 1 in the first half of February. These 3 YTD retail bankruptcies represent an improvement from 5 during the same time period last year. Retail fundamentals have largely held up pretty well despite cracks emerging in the economy. Due to very modest new supply in most markets, retail landlords have seen healthy demand for their rentable space. Tenant bankruptcies and store closings can be very damaging for retail landlords, so how these metrics trend throughout 2024 will likely impact the performance retail REITs.
There remains great uncertainty regarding both the strength of the economy and the future of rates due to very mixed recent economic data. Retail sales fell sharply (-0.8%) in January, indicating a weakening consumer, but hiring remained robust (+353,000 jobs). A continuation of the disinflation trend looks less certain after January’s unexpectedly high month-over-month increases in CPI (+0.3%), core CPI (+0.4%), PPI (+0.3%) and core PPI (+0.5%). If the inflation rate becomes entrenched above the Fed’s 2% annual target or even worse begins to reaccelerate, the highly anticipated multiple Fed rates cuts projected for the 2nd half of 2024 may not actually materialize.
Although many REITs are well capitalized, there are growing troubles overall across commercial real estate, and it is increasingly straining the ratio of loss reserves to delinquent loans at US banks. Overall, this ratio declined from 2.20 in 2022 down to 1.4 in 2023. Large US banks (Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM)) have seen this ratio drop from 1.6 down to 0.9 for loans in which the borrower is 30+ days late on one or more payments. Bank of America saw the most severe deterioration of this ratio in 2023. Citigroup and Goldman Sachs now have ratios below 0.5. A notable exception among the big banks is JPMorgan Chase & Co., which still has a very healthy CRE coverage ratio. It is important to note that not all delinquent loans will default of course, but such low coverage ratios certainly add greater risk.
With mixed economic data and some growing risks within commercial real estate, the spread between the best performing REITs and worst performing REITs in 2024 will likely be very wide. Fundamentals and valuations vary significantly across REIT property types as well as within each property type. Careful analysis at both levels is crucial. Substantial alpha can be achieved in a REIT portfolio through both property type allocation and individual REIT selection.
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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