The State Of REITs: August 2018 Edition

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Includes: BBRE, EWRE, FPI, FREL, FRI, FRIFX, HT, ICF, IYR, KBWY, NURE, PLYM, PPTY, QCP, REM, REZ, ROOF, RORE, RTL, RWR, SCHH, SRET, STAG, USRT, VNQ, WELL, XLRE
by: Simon Bowler

Summary

The REIT sector as a whole was flat (0.10% return) in July, but performance varied dramatically by property type.

Advertising and Data Center REITs outperformed, while Farmland and Timber REITs lagged.

REIT capital-raising has declined substantially year to date from the same period in 2017.

REITs have compelling upside potential from their current 5.6% median discount to net asset value.

REIT Performance

REITs averaged a meager 0.10% total return in July. After 4 consecutive months of solid outperformance against the broader market, REITs were trounced by the DJIA (4.71%), S&P 500 (3.6%) and NASDAQ (2.15%). Based on the better performance of large-cap REITs in July relative to their smaller peers, the market-cap weighted Vanguard Real Estate ETF (VNQ) had a higher total return (0.72%) than the average REIT (0.10%). During months in which large-cap REITs have underperformed, the VNQ has instead usually similarly underperformed the average REIT. With REITs still trading at a median discount to NAV of 5.6%, there is certainly the potential for REITs to move higher. Do July’s meager returns signal the beginning of a period of weak performance for REITs or was July merely a brief lull after which REITs will return to outperformance? 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.

Source: Graph by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

Although micro-cap REITs and large-cap REITs have trailed small and mid-cap REITs thus far in 2018, they were the top performers in July. Small-cap REITs had their first negative monthly return since February, while all other capitalization groups remained positive. Small-cap and mid-cap REITs, however, continue to lead the REIT sector YTD.

Source: Graph by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

9 out of 20 Property Types Yielded Positive Total Returns in July

Following 4 consecutive months of strong REIT performance, July narrowly remained in positive territory (+0.10%) despite more than half of REIT property types averaging a negative total return. Although the REIT sector as a whole remained nearly flat, July returns varied greatly by property type from Advertising (+8.52%) to Land (-11.82%). The July 11th collapse in share price of Farmland Partners (FPI), triggered by a Seeking Alpha article that alleged a litany of problems (overpayment for properties, improperly disclosed related-party transactions, etc.), pushed Land (-8.82% YTD) down to the worst performing property type thus far in 2018. It should be noted that although many law firms announced investigations into Farmland Partners after the allegations by the short seller who wrote the Seeking Alpha article, there has not yet been proof of any illegal or improper conduct. However, FPI’s share price has only partially recovered as the investigations into FPI by the law firms as well as an FPI lawsuit against the writers all remain active.

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

After a July in which the REIT sector’s performance was largely flat, 65% of REIT property types now average a positive YTD total return. This remains unchanged from the same 65% figure at the end of June, although Multifamily has moved into the black and Land into the red. Corrections (+17.66% YTD) remains the best performing property type thus far in 2018, with a return more than 10x that of the average REIT (+1.73% YTD).

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

The REIT sector as a whole saw no change in the average FFO/share from the beginning to the end of July. However, some property types saw meaningful FFO multiple expansion or contraction over the course of the month. For example: Due to strong price appreciation, Advertising REITs averaged a 1.1 turn expansion of their multiple, whereas Land saw their average FFO multiple fall by nearly 3 turns in July. It is important to recognize that even within property types trading at premium multiples, such as Industrial, there are often individual securities trading at discounted multiples. The Industrial REITs trading at the lowest FFO multiples are Plymouth Industrial REIT (PLYM) at 11.5x and STAG Industrial (STAG) at 15.3x, both of which trade well below the Industrial average of 22x.

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

Performance of Individual REIT Securities

A joint venture between healthcare REIT Welltower Inc. (WELL) and not-for-profit healthcare system ProMedica Health System Inc. closed on the $4.4 billion acquisition of Quality Care Properties Inc. (QCP) and its principal tenants, HCR ManorCare Inc. and Arden Courts. On July 26th, QCP closed with a stellar 50.18% YTD total return on its final day of trading. This substantial YTD total return is well in excess of the returns of any other REIT thus far in 2018. The next five best YTD returns all belong to hotel REITs, led by Hersha Hospitality Trust (HT) with a 29.7% YTD return as of the end of July.

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

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

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

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 07/31/2018) to lowest dividend yield.

REIT

Ticker

Dividend Yield

New Senior Investment Group Inc.

SNR

14.7%

CBL Properties

CBL

14.7%

Uniti Group Inc.

UNIT

13.6%

Washington Prime Group Inc.

WPG

12.5%

Government Properties Income Trust

GOV

11.4%

DDR Corp.

DDR

11.1%

Plymouth Industrial REIT, Inc.

PLYM

10.3%

Global Net Lease, Inc.

GNL

10.1%

Select Income REIT

SIR

9.8%

Global Medical REIT Inc.

GMRE

9.5%

Omega Healthcare Investors, Inc.

OHI

8.9%

Whitestone REIT

WSR

8.8%

Senior Housing Properties Trust

SNH

8.7%

Spirit Realty Capital, Inc.

SRC

8.6%

Sabra Health Care REIT, Inc.

SBRA

8.3%

Lexington Realty Trust

LXP

8.1%

Pennsylvania Real Estate Investment Trust

PEI

7.9%

CorEnergy Infrastructure Trust, Inc.

CORR

7.9%

Farmland Partners Inc.

FPI

7.6%

Gladstone Commercial Corporation

GOOD

7.6%

Kite Realty Group Trust

KRG

7.5%

MedEquities Realty Trust, Inc.

MRT

7.5%

Hospitality Properties Trust

HPT

7.5%

Condor Hospitality Trust, Inc.

CDOR

7.4%

City Office REIT, Inc.

CIO

7.4%

GEO Group, Inc.

GEO

7.3%

Sotherly Hotels Inc.

SOHO

7.2%

VEREIT, Inc.

VER

7.2%

Colony NorthStar, Inc.

CLNS

7.1%

Independence Realty Trust, Inc.

IRT

7.1%

Bluerock Residential Growth REIT, Inc.

BRG

7.1%

Medical Properties Trust, Inc.

MPW

6.9%

Gaming and Leisure Properties, Inc.

GLPI

6.9%

OUTFRONT Media Inc. (REIT)

OUT.REIT

6.8%

Kimco Realty Corporation

KIM

6.7%

CoreCivic, Inc.

CXW

6.7%

Iron Mountain Incorporated

IRM

6.7%

Ramco-Gershenson Properties Trust

RPT

6.7%

One Liberty Properties, Inc.

OLP

6.7%

Apple Hospitality REIT, Inc.

APLE

6.7%

EPR Properties

EPR

6.5%

W. P. Carey Inc.

WPC

6.2%

Brixmor Property Group Inc.

BRX

6.2%

Front Yard Residential Corporation

RESI

6.2%

Chatham Lodging Trust

CLDT

6.1%

BRT Apartments Corp.

BRT

6.1%

Ashford Hospitality Trust, Inc.

AHT

6.1%

Preferred Apartment Communities, Inc.

APTS

6.0%

Tanger Factory Outlet Centers, Inc.

SKT

5.9%

RLJ Lodging Trust

RLJ

5.8%

Physicians Realty Trust

DOC

5.8%

HCP, Inc.

HCP

5.7%

MGM Growth Properties LLC

MGP

5.7%

Ventas, Inc.

VTR

5.6%

Braemar Hotels & Resorts, Inc.

BHR

5.6%

Welltower Inc.

WELL

5.6%

Park Hotels & Resorts Inc.

PK

5.5%

Easterly Government Properties, Inc.

DEA

5.5%

Gramercy Property Trust

GPT

5.5%

LTC Properties, Inc.

LTC

5.4%

National Health Investors, Inc.

NHI

5.3%

Community Healthcare Trust Incorporated

CHCT

5.3%

Armada Hoffler Properties, Inc.

AHH

5.3%

Retail Properties of America, Inc.

RPAI

5.3%

Weingarten Realty Investors

WRI

5.2%

STAG Industrial, Inc.

STAG

5.2%

Hersha Hospitality Trust

HT

5.2%

VICI Properties Inc.

VICI

5.2%

Investors Real Estate Trust

IRET

5.1%

Summit Hotel Properties, Inc.

INN

5.1%

Macerich Company

MAC

5.0%

Chesapeake Lodging Trust

CHSP

5.0%

Lamar Advertising Company (REIT)

LAMR.REIT

4.9%

Alexander's, Inc.

ALX

4.9%

Urstadt Biddle Properties Inc.

UBA

4.9%

CareTrust REIT, Inc.

CTRE

4.8%

InfraREIT, Inc. (REIT)

HIFR.REIT

4.8%

Realty Income Corporation

O

4.7%

UMH Properties, Inc.

UMH

4.7%

Simon Property Group, Inc.

SPG

4.5%

STORE Capital Corporation

STOR

4.5%

Xenia Hotels & Resorts, Inc.

XHR

4.5%

National Retail Properties, Inc.

NNN

4.5%

Gladstone Land Corporation

LAND

4.5%

Getty Realty Corp.

GTY

4.5%

Healthcare Trust of America, Inc.

HTA

4.5%

American Campus Communities, Inc.

ACC

4.5%

Four Corners Property Trust, Inc.

FCPT

4.4%

NorthStar Realty Europe Corp.

NRE

4.4%

Brandywine Realty Trust

BDN

4.4%

CatchMark Timber Trust, Inc.

CTT

4.3%

Piedmont Office Realty Trust, Inc.

PDM

4.2%

Taubman Centers, Inc.

TCO

4.2%

Cedar Realty Trust, Inc.

CDR

4.2%

DiamondRock Hospitality Company

DRH

4.2%

Life Storage, Inc.

LSI

4.2%

GGP Inc.

GGP

4.1%

Retail Opportunity Investments Corp.

ROIC

4.1%

Mack-Cali Realty Corporation

CLI

4.1%

Franklin Street Properties Corp.

FSP

4.1%

Monmouth Real Estate Investment Corporation

MNR

4.1%

Agree Realty Corporation

ADC

4.1%

Healthcare Realty Trust Incorporated

HR

4.0%

National Storage Affiliates Trust

NSA

4.0%

Ryman Hospitality Properties, Inc.

RHP

4.0%

Acadia Realty Trust

AKR

4.0%

Universal Health Realty Income Trust

UHT

4.0%

CubeSmart

CUBE

4.0%

Pebblebrook Hotel Trust

PEB

3.9%

Washington Real Estate Investment Trust

WRE

3.9%

Saul Centers, Inc.

BFS

3.9%

Urban Edge Properties

UE

3.9%

QTS Realty Trust, Inc.

QTS

3.8%

Host Hotels & Resorts, Inc.

HST

3.8%

Crown Castle International Corp. (REIT)

CCI.REIT

3.8%

Education Realty Trust, Inc.

EDR

3.8%

Highwoods Properties, Inc.

HIW

3.8%

Weyerhaeuser Company

WY

3.7%

Liberty Property Trust

LPT

3.7%

Corporate Office Properties Trust

OFC

3.7%

CoreSite Realty Corporation

COR

3.7%

Public Storage

PSA

3.7%

Mid-America Apartment Communities, Inc.

MAA

3.7%

Extra Space Storage Inc.

EXR

3.7%

Clipper Realty Inc.

CLPR

3.6%

Apartment Investment and Management Company

AIV

3.6%

Vornado Realty Trust

VNO

3.5%

Regency Centers Corporation

REG

3.5%

Columbia Property Trust, Inc.

CXP

3.5%

Potlatch Corporation

PCH

3.4%

Safety, Income & Growth Inc.

SAFE

3.4%

UDR, Inc.

UDR

3.4%

NexPoint Residential Trust, Inc.

NXRT

3.3%

Digital Realty Trust, Inc.

DLR

3.3%

Camden Property Trust

CPT

3.3%

AvalonBay Communities, Inc.

AVB

3.3%

Equity Residential

EQR

3.3%

CIM Commercial Trust Corporation

CMCT

3.3%

Federal Realty Investment Trust

FRT

3.2%

SL Green Realty Corp.

SLG

3.2%

Essex Property Trust, Inc.

ESS

3.1%

Innovative Industrial Properties, Inc.

IIPR

3.1%

Rayonier Inc.

RYN

3.1%

TIER REIT, Inc.

TIER

3.0%

CyrusOne Inc.

CONE

3.0%

Sun Communities, Inc.

SUI

2.9%

Prologis, Inc.

PLD

2.9%

Alexandria Real Estate Equities, Inc.

ARE

2.9%

Hudson Pacific Properties, Inc.

HPP

2.9%

Forest City Realty Trust, Inc.

FCE.A

2.9%

American Assets Trust, Inc.

AAT

2.8%

Cousins Properties Incorporated

CUZ

2.8%

Duke Realty Corporation

DRE

2.7%

EastGroup Properties, Inc.

EGP

2.7%

First Industrial Realty Trust, Inc.

FR

2.7%

PS Business Parks, Inc.

PSB

2.7%

LaSalle Hotel Properties

LHO

2.6%

Paramount Group, Inc.

PGRE

2.6%

Douglas Emmett, Inc.

DEI

2.6%

Boston Properties, Inc.

BXP

2.5%

Empire State Realty Trust, Inc.

ESRT

2.5%

Kilroy Realty Corporation

KRC

2.5%

JBG SMITH Properties

JBGS

2.5%

Equity LifeStyle Properties, Inc.

ELS

2.4%

Terreno Realty Corporation

TRNO

2.4%

Seritage Growth Properties

SRG

2.4%

DCT Industrial Trust Inc.

DCT

2.2%

Rexford Industrial Realty, Inc.

REXR

2.1%

American Tower Corporation (REIT)

AMT.REIT

2.1%

Equinix, Inc. (REIT)

EQIX.REIT

2.1%

Invitation Homes Inc.

INVH

1.9%

Sunstone Hotel Investors, Inc.

SHO

1.2%

American Homes 4 Rent

AMH

0.9%

SBA Communications Corporation (REIT)

SBAC.REIT

0.0%

iStar Inc.

STAR

0.0%

New York REIT, Inc.

NYRT

0.0%

Alexander & Baldwin, Inc.

ALEX

0.0%

Equity Commonwealth

EQC

0.0%

Reven Housing REIT, Inc.

RVEN

0.0%

Wheeler Real Estate Investment Trust, Inc.

WHLR

0.0%

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

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

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

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.

Source: Table by Simon Bowler, Data compiled from SNL.com, See important notes and disclosures at the end of this article

REIT Capital-Raising Activity

REIT capital-raising activity was significantly lower in July 2018 than in was in July 2017, declining by 81.8% year over year. July’s lower figure was in keeping with the markedly lower total dollars of common equity, preferred equity and senior debt offerings thus far in 2018 relative to the same YTD period of 2017. This significant reduction in capital raising is largely the result of the persistently large discounts to NAV that have plagued many REITs since the broad REIT selloff in January and February. If REIT share prices rally over upcoming months, we may see an uptick in capital-raising in the fourth quarter.

Source: SNL.com and S&P Global Market Intelligence, See important notes and disclosures at the end of this article

Valuation

REITs ended the month of July trading at a median discount to NAV of 5.6%, which remains steeper than the 3.4% discount at which REITs began the year. 5 of the 10 REITs trading at the largest premium to NAV are healthcare REITS and 3 of the 10 largest discounts to NAV belong to office REITs. Although Malls and Shopping Centers have outperformed the REIT sector as a whole in June and July, they continue to remain at the largest discounts to NAV of all REIT property types.

Source: SNL.com and S&P Global Market Intelligence, See important notes and disclosures at the end of this article

Takeaway

After 4 consecutive months (March-June) of strong REIT sector recovery that was consistently outpacing the broader market, REITs barely trod water in July with a meager 0.10% total return. However, even in a flat market, active investors can achieve strong positive returns by allocating to well-positioned property types (Ex: rapidly growing manufactured housing) and carefully selecting securities that are trading at either larger discounts or smaller premiums than are warranted (Ex: some of the overly-discounted class B industrial REITs). Regardless of whether the publicly traded REIT sector turns negative, remains flat, or picks up steam again in August, a thorough analysis of the data provides an opportunity for active investors to better achieve their investing goals.

Disclosure: I am/we are long FPI, PLYM, STAG, HT.

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.

Additional disclosure: 2nd Market Capital and its affiliated accounts are long FPI, PLYM, STAG and HT. I am personally long FPI, PLYM and STAG. 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.