The Worst Performing REITs YTD: June 2019

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Includes: AFIN, AGNC, ANH, ARR, CBL, CDR, CHMI, CLPR, DX, HT, ILPT, IRM, IYR, MAC, NLY, OPI, ORC, PEB, SKT, SNH, SPG, SPY, STGPF, TCI, TCO, TWO, UNIT, VNQ, WINMQ, WPG
by: BOOX Research
Summary

Article highlights the 30 worst performing REITs year to date with a market cap above $100m.

Discussion of trends and developments among REITs.

Analysis of sub-industry returns.

Selecting from an equity screening database with 321 stocks classified as real estate investment trust ("REIT") trading on a U.S. exchange, I further narrow the list by filtering for companies with a market cap above $100 million and at least $100,000 in average trading volume over the past month. The result is 210 REITs that I consider to be in my tradable universe. This article presents the 30 worst performing REITs year to date as of June 5, 2019. Sub-industry trends and macro developments are discussed along with my views on where the group is headed next.

REITs 2019

REITs have outperformed the broad stock market and S&P 500 (SPY) in 2019 so far and over the past year. Two of the largest REIT specific exchange-traded funds, the Vanguard Real Estate ETF (VNQ) and the iShares U.S. Real Estate ETF (IYR), are each up 19.7% and 19.3% YTD 2019, compared to just a 14.7% price return in the SPY. The spread is wider over the past year, with VNQ and IYR up 11.6% and 12.8% ahead of just a 4% return for SPY over the period.

Financial markets have been exceptionally volatile, particularly since Q3 2018 with emerging concerns of a global cyclical slowdown and policy uncertainty from the Fed. December 2018 was a historically poor month for equity markets (REITs included), posting large declines to end the year. The narrative changed into January with more dovish signaling from the Fed, better than expected earnings reports, along with resilient economic data. The strong market performance in ways can be viewed recovering from Q4 back to all-time highs reached last year.

In my data set, REITs as a group are up 14.5% in 2019 on an equal weighted average, yet that same group is still down on average 12% off their 52-week highs. Nearly 20% of the REITs are down more than 20% from their highest levels in the past year effectively in a bear market. The wide dispersion of returns across different time frames reflects not only the ongoing volatility but also the importance of diversification. While there have been some big winners, the data below presents the worst performers of the group.

30 Worst Performing REITs

The 30 worst performing REITs all have negative price returns in 2019. Investors holding these stocks likely fared a little better considering dividend payments are included in calculating separate total returns.

One of the themes from the group above is the number of retail REITs. The industry has suffered from an outlook of lower rental income with some REITs forced to lower rents or offer concession. Store tenants are struggling in a changing operating environment where consumers are shopping more online, leading to lower store traffic and declining sales. A number of high profile retail bankruptcies like Payless Shoes and Gymboree, among store closures announced by Dressbarn are some examples just from 2019 that continue to be an ominous cloud in the group. High leverage, liquidity concerns, and dividend cut patterns observed from the worst performers.

CBL & Associates Properties Inc. (CBL) is the worst performing REIT this year, down a massive 54.2% and 83% over the past year. The company operates malls and has suffered through a number of tenant bankruptcies while liquidity concerns forced a dividend cut.

Senior Housing Properties Trust (SNH) is also a big loser, down 31.6%. Recent news of the healthcare REIT forced to sell a number of properties along with a dividend cut explain the weak sentiment. The company expects to achieve a debt-to-adjusted EBITDA ratio of about 6x by the end of 2019.

Uniti Group Inc. (UNIT) is down 30.8% YTD. The company is a "tech" REIT leasing tower space to wireless carriers and other industrial users. In May, one of its tenants, Windstream Holdings Inc. (OTCPK:OTCPK:WINMQ), made headlines suggesting its rents were above market rates and is looking at options to amend agreements.

Washington Prime Group (WPG) and Tanger Factory Outlet Centers (SKT) are both down approximately 15% this year. The two retail REITs are suffering as U.S. retailers have announced over 7,000 store closures this year. The question becomes which tenants will take on those locations and what impact will the pressure have on new lease contracts across the industry.

It's worth noting the intriguing stated dividends for many of these REITs. 12 of the 30 stocks here have forward yields above 8%, which for me is a level that signals a higher risk for a potential future dividend cut. While some of the upcoming dividends will likely be paid, investors should be skeptical of any +8% yielding investment. Yields around and above this level for publicly traded stocks generally reflect deep pessimism in the market over future growth and solvency concerns. High yield comes with high risk. WPG announced a $0.25 dividend back in May 16, representing a 20% forward yield at the time, but the stock subsequently fell $0.90 in the period since.

I'm bearish on the retail REITs in particular under the assumption that the current trends in brick-and-mortar are still in the early stages. Rents across the industry may need to take a leg lower to reflect the reality. Take a look at my recent article on Simon Property Group (SPG) highlighting some of the issues.

Conclusion

This list here should serve as a good starting point for further research and due diligence to potentially pick out some good turnaround candidates. On the other hand, it's likely many in this group will continue to fall further as their operational and financial outlooks deteriorate. Stocks that have underperformed the market and peer group significantly typically have serious fundamental issues that need to be understood before making any investment decision. Investors that were overweight any of these names relative to benchmarks likely underperformed, demonstrating the value of diversification.

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.