The State Of REITs: April 2018 Edition
Summary
- REITs rebounded slightly in March but finished the 1st quarter down about 9%.
- Large cap REITs significantly outperformed smaller market cap REITs.
- Shopping Center REITs experienced the worst selloff of all property types.
- REITS underperformed the S&P 500 in Q1, but outperformed in March as the broader market continued to sell off.
- Was March merely a pause before a further selloff or was it the beginning of a comeback for REITs?
Summary
The REIT sector experienced a significant sell-off in January and February with a total return of -12.32%. In March, however, REITs rebounded slightly with a 3.67% return. After severely underperforming the broader market during January and February, REITs produced a solid March outperformance over the negative returns of the S&P 500 (-2.69%), NASDAQ (-2.88%) and DJIA (-3.70%). Although the REIT sector as a whole had a strong month, returns varied greatly across different market caps and property types. This presents a terrific opportunity to dig into the data, analyze current pricing and identify the property types and securities with the most attractive relative valuations. 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
Small cap REITs yielded the highest total return (5.6%) in March, followed by large cap REITs (4.3%). The underperformance of micro-cap REITs continued in March with another negative return (-0.4%). Year to date, however, there has been a strong positive correlation between market cap and total return.
Source: Graph by Simon Bowler, Data compiled from SNL.com
The disparity of performance between large cap REITs and smaller cap REITS was significant during the 1st quarter, with large cap REITs outperforming the REIT average by over 300 basis points. Performance by property type had even more variance:
Source: Table by Simon Bowler, Data compiled from SNL.com
14 out of 20 REIT Property Types Yielded Positive Total Returns in March
This marks a notable improvement from the first two months of the year, in which only Timber saw a positive return. Health Care (+8.8%) had the strongest performance in March largely due to the 56.8% return of Quality Care Properties (QCP), which announced that it would acquire 100% equity ownership of troubled tenant HCR Manorcare in exchange for QCP dropping all claims against HCR Manorcare. Manorcare is currently going through the Chapter 11 bankruptcy process and this deal is pending bankruptcy court approval. Manufactured Housing (8.2%) and Multifamily (8.1%) also led the REIT rebound in March. However, all 3 property types (as well as 15 others), remain negative YTD. The worst performer in March was Single Family Housing (-8.8%), primarily due to the 39.5% decline of Reven Housing REIT (RVEN). Timber and Infrastructure are the only property types in positive territory thus far in 2018.
Source: Table by Simon Bowler, Data compiled from SNL.com
At the end of March, REITs averaged a -9.07% YTD return, up from their -12.32% YTD return at the end of February. The REIT turnaround in March led to a small FFO multiple expansion for many of the REIT property types, although 4 still remain in single digits. The average Price/FFO of equity REITs rose from 13.9X to 14.3X in March, but remains notably lower than it began the year. Although market volatility could push prices in either direction, REITs remain quite discounted and have the potential for further multiple expansion during the 2nd quarter.
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 -9% total return YTD, performance has varied dramatically from the -64% collapse of Wheeler Real Estate Investment Trust (WHLR) to the stellar 41% return of Quality Care Properties. 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 03/31/2018) 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_April_2018.pdf
Source: Table by Simon Bowler, Data compiled from SNL.com
Conclusion
In January and February, REITs were sold rapidly, and in many cases indiscriminately, as investors panicked about rising rates. March, however, saw positive total returns for 70% of REIT property types and 80% of REIT securities. The significant changes in price in Q1 2018 may in some cases by warranted by fundamentals on the sector or company level. During times of great market volatility, however, the direction and magnitude of price changes can in some cases become disconnected from these underlying fundamentals. For this reason, a frequent and thorough analysis of REIT data can help identify relative value opportunities. 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 my The State of REITs monthly article series 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 will continue to present this data and analysis in a monthly update here on Seeking Alpha. Additionally, I will continue to add 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.
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.
This article was written by
Simon Bowler is the Chief Communications Officer at 2nd Market Capital Advisory Corporation (2MCAC). 2MCAC specializes in the analysis and trading of real estate securities. Through a selective process and consideration of market dynamics, we aim to construct portfolios for rising streams of dividend income and capital appreciation.Our Portfolio Income Solutions Marketplace service provides stock picks, extensive analysis and data sheets to help enhance the returns of do-it-yourself investors.Investment Advisory Services
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