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The State Of REITs: November 2018 Edition



  • The REIT sector produced a negative return for the second straight month.
  • Large-cap REITs outperformed their smaller peers in October.
  • Self-storage REITs led all property types, while Timber lagged.
  • CIM Commercial Trust was the best-performing REIT in October, while Wheeler REIT had the worst performance.
  • After a rough September and October, REITs are now trading at a staggering 11.4% average discount to consensus NAV.

REIT Performance

After a rough September (-2.54% total return), the REIT sector performed even worse in October (-3.91% total return). However, the disappointing performance of REITs was actually less dismal than that of the broader market, which generated even larger negative returns in October. REITs outperformed the S&P 500 (-6.94%), DJIA (-5.07%) and NASDAQ (-9.20%). Based on the outperformance of large-cap REITs in October relative to their smaller peers, the market-cap weighted Vanguard Real Estate ETF (VNQ) had a notably higher total return (-2.93%) than the average REIT (-3.91%). The REIT selloff of September and October was fueled largely by fear that the Fed will not slow its pace of quarterly rate hikes. Solid REIT earnings and the reduction of legislative uncertainty post-election, however, could serve to somewhat calm market volatility. If investors begin putting more of their money back into the market, will the tremendous 11.4% discount to NAV be enough to attract more investment into the REIT sector? Which REIT property types are currently best positioned to outperform as money comes back into 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.

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article.

During the first three quarters of 2018, large-cap REITs averaged a total return well below that of micro-cap, small-cap and mid-cap REITs. However, this flipped in October as large-cap REITs weathered the selloff rather well (-1%), unlike their smaller peers that saw dramatic declines in share price (from -3.8% to -5.6%). There was a strong positive correlation between market cap and total return in October. Although REITs of all sizes are down thus far in 2018, large-cap REITs now have the

This article was written by

Simon Bowler profile picture

Simon Bowler is the Chief Communications Officer at 2nd Market Capital Advisory Corporation, a Wisconsin-registered investment advisor specializing in the analysis and trading of real estate securities. Simon and his team are fiduciaries with over 50 years of collective experience as professional REIT analysts and asset managers.

They lead the investing group Portfolio Income Solutions where they convey REIT investment ideas through access to their actively managed portfolio, continuously updated spreadsheets, and extensive analysis. Stock selections in Portfolio Income Solutions utilizes discount to fair value, price dislocations, and arbitrages to achieve enhanced return potential. Learn more.

Analyst’s Disclosure: I am/we are long IRM & SNR. 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.

2nd Market Capital and its affiliated accounts are long IRM and SNR. I am personally long IRM. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (13)

@Simon Bowler -- I feel that I should know this, but why is Catchmark the only timber reit with a price/ffo ratio? Is it because of other operations the other 3 have that would complicate a FFO?

Thanks for the update -- always insightful
Simon Bowler profile picture
Hey mcgreg. The reason is that FFO is not the primary valuation metric for Timber REITs. It is more common for these REITs to be valued based on NAV or even adjusted EBITDA multiples. CTT is the only publicly traded REIT that currently has analyst estimates for FFO/share, so it is the only one that I included in the table. Given that FFO/share is a relevant valuation metric for every other property type, I compiled the data for the REIT sector using this metric and for the sake of consistency included Timber as well. However, it is important to note that given that FFO/share is not an ideal metric upon which to value Timber, a 14x FFO multiple does not imply that Timber (or in this case CTT specifically) is cheaper than Office (15x) or more expensive than Health Care (12.9x).

A great article, and a philosophical nit. The Total Return figures might be misleading in that the cap bin drops as a REIT's price/share drops, that is, yesterday's mid-cap could be today's small cap just by the force of gravity, creating a bias towards running up the loss totals in the smaller bins. Its an angle that occurred to me as I hold CBL and WPG and they have become increasingly less relevant in terms of % of my overall portfolio value as they drop more than the market.

Which is where the objective mental rub is at -- logically, a fallen stock can consume a lot of pain-fearing ongoing attention, but the fact is its potential to cause a lot more pain is limited by how little more it has to fall to reach zero. Yeah, reaching zero is no one's idea of fun, but again the logical thing is to pay attention in proportion to a holding's current-value vs the total pie and not the if-only-I-sold phantom. Thanks again.
Simon Bowler profile picture
Hey Derf. Interesting thoughts. Regarding your first point. You are correct to say that there is a risk that as stocks rise or fall, that they could move up or down in market cap category skewing results. I also considered this risk and in order to mitigate it, I have kept the market cap tier of each REIT fixed at beginning of year levels for the duration of 2018. All REIT market caps will be re-assessed at the beginning of 2019 and again fixed for the duration of that year.

I will admit that the downside of this approach is that the stated market cap tier of some REITs will at times be outdated if the REIT's market cap has dramatically increased or decreased year to date. However, I consider this brief delay in moving a REIT to a higher or lower market cap tier to pale in comparison to the value of retaining accurate statistical measures of total return. I am glad to hear that you too are statistically minded and considered this risk as well.

Regarding your 2nd point, I think you are correct in your assertion that a stock that has already fallen to a substantially discounted price is arguably less risky that one that has not. When a greater degree of risk is already priced in to a security's share price, there is less downside risk (given that bad news is already priced in) and greater upside potential (in that moderate or good news is not priced in and thus could produce a meaningful increase in share price if it occurs).
Universal Huckleberry profile picture
Fantastic overview! I especially appreciate the P/FFO chart and the monthly-pay chart, and the discount to NAV chart is very helpful as well. I sometimes catch myself looking at the trees so much I lose sight of the forest, and you have provided a superb view of the landscape. Thank you.
Simon Bowler profile picture
Thank you, Huckleberry, for your eloquently worded comment! I will continue to publish a new The State of REITs report every month.
Appreciate the lack of bias. The stats make my decisions so much easier. Keep them coming.
Simon Bowler profile picture
Thank you, 4NSIC. I think that compiling the data and presenting a detailed analysis with minimal bias allows readers to best utilize the data for making decisions about what is best for their own investments. I am glad to hear that it is helpful for you! I will continue to present updated data each month.
RoseNose profile picture
Great comprehensive study of eREITs @Dane Bowler !
It can be used as a great resource.
Thank you for the statistics and P/FFO for each sector as well.
I also have been adding to IRM, a great buy recently and perhaps even today.
Even DLR is falling to an attractive, but not yet real attractive level as well.
It would seem the over valued/priced are now meeting up with the under valued priced with many in the middle just providing great income.
No position in SNR and I do hope it does get some suitors.
Happy Investing :)) Rose
Simon Bowler profile picture
Thank you, Rose! I am glad that this data is useful for you. I agree with you that DLR's share price is approaching a more appealing level and is certainly worth monitoring, but it would still need to fall a bit further to reach a sufficiently attractive entry point.
DavidBaird profile picture
So...., do you expect to add to you positions in IRM and SNR?
I'm very optimistic on New Senior Investment Group (SNR).
Simon Bowler profile picture
Hey David. I have already been increasing my IRM position and may further increase it if the price drops or remains substantially discounted. Regarding SNR, I am monitoring company and industry news to watch for signs of potential upcoming M&A activity as well as changes in company fundamentals. I will base any SNR trading on pricing, changes to company fundamentals and any such M&A news or activity that is made public.
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