The State Of REITs: March 2018 Edition

Summary

• REIT performance year to date has varied dramatically by market cap, property type and individual security, presenting relative value opportunities.
• Fearful investors panicked and sold at much higher than average volumes.
• REITs with smaller market caps presented higher liquidity challenges to fearful investors.
• There has been a strong positive correlation between market cap and year to date total return for REITs.
• Timber is the only REIT property type with a positive YTD total return.

Although the REIT sector (to a much greater extent than the broader market) has collectively sold off to lower multiples, the magnitude of declines were not consistent across property types or among stocks within each property type. As a result, this represents a terrific opportunity to evaluate current valuations and rebalance accordingly. Significant and varied changes in price always present opportunities to capitalize on temporary shifts in relative valuation. For this reason, I will provide data throughout this article that can be used to determine where value opportunities currently exist within the REIT sector.

Source: Graph by Simon Bowler, Data compiled from SNL.com

As can be seen in the graph above, there has been a strong positive correlation between market cap and the total return of REIT securities. During the first 2 months of 2018, smaller capitalization REITs have fallen much farther than their larger cap peers. This result is actually not particularly surprising in such a rapid selloff and can primarily be explained by the differences in liquidity between larger and smaller market cap REIT securities.

Some of the REIT securities that experienced the greatest declines in price during this correction were those that presented liquidity challenges due to low trading volume. A large market order placed on a stock with low trading volume can lead to a much larger change in price than a similar order placed on a stock with high trading volume. As a result, many of the small and micro-cap REITs (which have fewer dollars of shares outstanding than do large cap REITs) fell the most precipitously. This collectively larger decline in share price was not primarily due to some bigger problem with small cap company fundamentals, but rather was in large part the result of scared investors rapidly selling assets to a disproportionately small pool of buyers. It is important to evaluate each security individually, however, as some REITs had disproportionately good or bad share price performance based on 4Q earnings, guidance or other data pertaining to company fundamentals. Opportunity exists in determining which property types or individual securities saw their share price change on a relative basis by an amount that does not appropriately reflect their fundamentals. As a result, certain REITs (some of which were already attractively valued before the selloff) now offer a very attractive entry point (or for those who already hold these stocks, a great opportunity to reduce their average cost basis and increase their portfolio holdings).

Source: Table by Simon Bowler, Data compiled from SNL.com

It should be noted that the magnitude of the REIT selloff is often not fully recognized due to most REIT sector coverage focusing on market cap weighted figures. Given that large cap REITs did not sell off as severely as smaller cap REITs, the market cap weighting of the sector skews the data closer to the performance of the large cap securities. The MSCI US REIT Index {RMS}, which is market cap weighted, had a YTD return of -11.54%. The Vanguard REIT ETF (VNQ), also market cap weighted, had a YTD return of -11.61%. These compare to the equal weighted REIT sector return of -12.32%, which is more than 70 bps lower.

Timber is the Only REIT Property Type with Positive Total Return YTD; Data Centers had Worst Return

All four Timber REITs were among the top ten highest total return REITs year to date. The high multiples on data centers have come down quite a bit thus far this year. However, the average Data Center REIT still trades at a P/FFO multiple more than 3 turns higher than the REIT average.

Source: Table by Simon Bowler, Data compiled from SNL.com

The multiples shown in the table above represent the average P/FFO of the equity REIT securities of each property type. The P/FFO figures in the table above exclude data from 13 REITs. This is due to insufficient analyst estimates of 2018 FFO/Share. This is the reason that only 1 Advertising REIT and 1 Timber REIT are included. The 13 REITs for which there is no P/FFO data are marked N/A in the table below. Once 2018 FFO/Share estimates are available for these REITs, I will add the data to the table in future updates. It is important to note that when comparing across different property types, P/FFO may be the best valuation metric for securities of one property type, but P/AFFO may be more appropriate for securities of another property type (example: Office).

Performance of Individual REIT Securities

Although the average equity REIT has yielded a -12% total return YTD, performance has varied massively from the -50% freefall of Wheeler Real Estate Investment Trust (WHLR) to the strong 9% return of New York REIT (NYRT). For those who are interested, I have included in the table below the full list of REIT YTD returns ranked from worst performance to best. Additionally, I have included the Price/FFO and Dividend Yields for each equity REIT (as of 02/28/2018) to provide the reader with additional relevant information that can be used to determine which REITs represent the most attractive opportunity.

For the convenience of reading this table in a larger font, the table above is available as a PDF as well:

Simon_Bowler_REIT_Data_March.pdf

Source: Table by Simon Bowler, Data compiled from SNL.com

Conclusion

The significant disparity in REIT performance may in some cases be warranted by the fundamentals on the company level. However, changes in price often occur at a magnitude and even direction that is not justified by fundamentals. Given how quickly and significantly pricing changes, it is worth frequently examining which of the securities now have the most attractive pricing. Although I have written and will continue to write articles in which I present a buy thesis or sell thesis on individual securities, the purpose of this article is to present data and analysis in a largely objective fashion and allow the readers to utilize this data to determine which securities represent the best opportunity to achieve their investing objectives.

I am continuously compiling REIT data and analyzing it for value capture opportunities. I intend to present this data and analysis in a monthly update here on Seeking Alpha. Additionally, I will consider adding further analysis or additional data to future updates. Feel free to let me know in the comments whether you have found this data and analysis useful and any other specific data or commentary that would be of value in future updates. I will certainly not be able to fulfill all data requests, but I will attempt to add a couple of useful data requests to future updates.

Disclosure: This article is provided for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer. Information contained in this article is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions. Simon Bowler is an investment advisor representative of 2MCAC, a Wisconsin registered investment advisor. Positive comments made by others should not be construed as an endorsement of the writer's abilities as an investment advisor representative. Commentary may contain forward looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts and findings in this article. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.