The State of REITs: January 2024 Edition
- The REIT sector closed the year out strong with a +11.40% total return in December, pushing into positive territory for the full year (+8.66%).
- Small cap REITs (+13.39%) outperformed in December. Large cap REITs (+9.55%) averaged a lower return than their smaller peers.
- 79% of REIT securities had a positive total return in December with 66.25% in the black for the full year.
- 17 out of 18 REIT property types averaged a positive total return in December led by Malls (+34.96%) and Self Storage (+18.19%). Infrastructure (-0.61%) was the only REIT property type in the red.
- The average REIT NAV discount narrowed from -20.50% to -12.94% during December. The median NAV discount narrowed from -19.74% to -11.21%.
The REIT sector followed up a strong November performance (+9.50%) with an even better December (+11.40%). The average REIT total return in December far exceeded that of the broader market with more than double the return of the NASDAQ (+5.6%), Dow Jones Industrial Average (+4.9%), and S&P 500 (4.5%). The market cap weighted Vanguard Real Estate ETF (VNQ) fell short of the average REIT in December (+9.43% vs. +11.40%), but outperformed YTD (+11.79% vs. +8.66%). The spread between the 2023 FFO multiples of large cap REITs (17.0x) and small cap REITs (13.3x) narrowed again in December as multiples expanded 0.6 turns for large caps and 0.7 turns for small caps. Investors currently need to pay an average of 27.8% 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.
17 out of 18 Property Types Yielded Positive Total Returns in December
94.4% percent of REIT property types averaged a positive total return in December. There was a massive 35.57% total return spread between the best and worst performing property types. Malls (+34.96%) handily outperformed all other REIT property types in December.
Infrastructure (-0.61%) was the only property type in the red in December, dragged down by the poor performance of CorEnergy Infrastructure Trust (CORR) (-23.91%), which more than offset the positive returns of Uniti Group (UNIT) (+7.26%), Power REIT (PW) (+6.51%), American Tower (AMT) (+4.21%) and SBA Communications (SBAC) (+2.73%).
Performance of Individual Securities
RPT Realty (RPT) was acquired by Kimco (KIM) in an all-stock transaction with the closing announced before market on January 2, 2024. The final trading date for RPT was December 29th, the last trading day of 2023. RPT shareholders received 0.6049 shares of KIM for each share of RPT held.
Pennsylvania REIT (PRET) (+85.54%) saw a sharp spike upwards on the announcement on December 11th that although the current common and preferred shares will be cancelled in its Chapter 11 bankruptcy, shareholders will not be completely wiped out. Instead, preferred and common shareholders will each get a portion of a $10M payment. Despite the huge December gain, PRET finished the year with the 4th worst REIT total return in 2023 (-60.68%). Diversified Healthcare Trust (DHC) was the 2nd best performing REIT in December (+59.83%) and significantly outperformed all other REITs with an extraordinary +497.63% total return in 2023.
CorEnergy Infrastructure Trust (CORR) (-23.91%) fell sharply in December after being delisted from the NYSE on December 4th. CORR is still trading on the OTC marketplace. CORR’s brutal -83.25% total return in 2023, however, was only the 3rd worst REIT performance with even steeper losses seen by Power REIT (PW) (-83.55%) and Wheeler REIT (WHLR) (-97.81%).
90.79% of REITs had a positive total return in December with 66.25% in the black year to date. During full year 2022 the average REIT had a -23.56% return. The average REIT finished 2023 in the black with an +8.66% average total return.
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 12/31/2023) 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.
The large cap REIT premium (relative to small cap REITs) narrowed in December 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 (17x/13.3x – 1 = 27.8%). As can be seen in the table below, there is presently a strong positive correlation between market cap and FFO multiple.
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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
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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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