The State Of REITs: December 2019 Edition
Summary
- The average REIT had a negative monthly total return for just the 2nd time in 2019, with a -0.6% in November.
- Small-cap REITs outperformed large caps by 266 basis points.
- Just over half of REIT securities (50.84%) had negative total returns in November.
- Land and Timber REITs led all property types in November, while Corrections and Healthcare lagged.
- 92% of large-cap REITs trade at a Price/FFO premium to the average small-cap REIT.
REIT Performance
November was a good month for the broader stock market, but not for the REIT sector, which saw only its 2nd negative month of 2019 (-0.60%). Despite fading slightly in November, the average equity REIT still has achieved a very strong return of 29.13% over the first 11 months of 2019. The REIT sector badly lagged the NASDAQ (+4.5%), S&P 500 (+3.4%) and the Dow Jones Industrial Average (+3.72%) in November. The market cap-weighted Vanguard Real Estate ETF (VNQ) underperformed the average REIT again in November (-1.3% vs. -0.6%), and fell further behind year to date after the first 11 months of the year (+27.91% vs. +29.13%). The spread between the 2020 FFO multiples of large-cap REITs (20.4x) and small-cap REITs (14.4) narrowed in November as multiples fell an average of 0.1 turns for small caps and 0.7 turns for large caps. 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.
For the 3rd month in a row, REIT performance and market cap were negatively correlated. Micro-cap (+1.08%) and small-cap REITs (+0.23%) yielded positive returns, but the average returns of mid-cap (-1.01%) and large-cap REITs (-2.43%) were negative. Micro-cap REITs continue to outperform their larger peers and now average a stellar 40.44% year to date. This disparity of September performance was enough for micro-cap REITs (+34.58%) to overtake large-cap REITs (+31.07%) as the top performers year to date. Mid-cap REITs underperformed again in November (-1.01% vs. -0.60%) and remain behind their peers year to date (+25.28% vs. 28.73%).
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.
8 out of 20 Property Types Yielded Positive Total Returns in November
40% of REIT property types averaged a positive total return in November, with a relatively narrow 12.86% total return spread between the best- and worst-performing property types. Land (+8.03%) and Timber (+5.38%) had the best average returns. Land’s strong performance in November was led by the 18.13% return of Safehold (SAFE). Corrections (-4.83%) was already the worst-performing property type of 2019 going into November and sunk even further throughout the month as fears of the impact of the 2020 election linger. Many of the potential Democratic presidential nominees have pledged to eliminate all federal contracts with private prisons. Corrections REITs saw similar multiple contraction in the lead-up to the 2016 election in which Hillary Clinton had taken a comparable position on the private prison industry. Corrections multiples rebounded sharply post-election, however, after her defeat. Although both CoreCivic (CXW) and GEO Group (GEO) have performed exceptionally well operationally over the first 3 quarters of the year, their multiples are likely to remain volatile throughout the Democratic primaries and the general election.
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article.
All REIT property types except for Corrections (-15.57%) and Malls (-5.31%) remain in the black after the first 11 months of 2019. Land (+62.08%) and Manufactured Housing (52.91%) have provided investors with higher total returns than all other property types year to date. 90% of REIT property types average double-digit positive returns thus far this year.
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article.
The REIT sector as a whole saw the average P/FFO (2020) decline during November (from 16.5x down to 16.3x). During November, the average FFO multiples rose for 40% of property types and fell for 60%. Manufactured Housing began the month trading at the highest average multiple and saw further multiple expansion during November (from 27.1x to 28.2x). After a September rally in Mall REITs, Corrections continues to trade at a lower FFO multiple (6x) than any other property type, followed by Malls (7.1x) and Hotels (9x). All other property types average a double-digit FFO multiple.
Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article.
Performance of Individual Securities
On November 5th, micro cap Reven Housing REIT (RVEN) was acquired by Pacific Oak Strategic Opportunity REIT, Inc. (formerly known as KBS Strategic Opportunity REIT) for $56.6 million ($5.13 per share). At closing, Reven’s name was changed to Pacific Oak Residential Trust and it became an indirect, 100% owned unit of Pacific Oak Strategic Opportunity REIT. RVEN generated a 56.57% return in 2019, but is no longer publicly traded due to the acquisition.
Safehold (SAFE) outperformed all other REITs in November (+18.13%), driven in part by the announcement of its addition to the S&P SmallCap 600 on November 25th. SAFE replaced Oritani Financial (ORIT), which was acquired by Valley National Bancorp. SAFE officially was added to the S&P SmallCap 600 on December 3rd.
Senior Housing Properties Trust (SNH) had the lowest total return (-26.25%) in November. SNH reported disappointing 3rd quarter earnings which included a 31% FFO/share decline from Q3 2018 and a shockingly bad 15% same-property cash basis NOI decline. SNH continues to suffer from the massive value transfer from SNH to its largest tenant, Five Star Senior Living (FVE). This value transfer was orchestrated by RMR Group (RMR), the external manager of both SNH and FVE. In order to save the badly struggling FVE, RMR dramatically cut the rent that FVE pays to SNH (from $17.4 million to $11 million annually). SNH also provided a $25 million short-term revolving credit facility to FVE and purchased approximately $50 million of non-revenue generating FF&E from FVE. Although this value transfer happened early this year, the significantly reduced profitability of SNH continues to produce disappointing earnings and reduced investor confidence in this struggling REIT.
49.16% of REITs had a positive return in November, with 90.66% in the black year to date. During the first 11 months of last year, the average REIT had only a +0.58% return, whereas this year the average REIT has already seen a total return more than 50x higher (+29.13%).
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
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 11/30/2019) to lowest dividend yield.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
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 of 2nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article.
Valuation
NAV Data as of November 30th, 2019
The REIT sector median discount to Net Asset Value widened in November from 1.4% to 2.5%.
The median NAV premium of Healthcare REITs narrowed from 30.6% to 21.8% in December, but Healthcare remains the REIT property type afforded the largest premium by the market. Other Retail (for example: free-standing net lease retail) also trades at a substantial premium of 21.2%, up from 18.8% at the end of October. Community Healthcare Trust (CHCT) saw a share price decline in November, but continues to trade at the largest premium to Net Asset Value, currently priced at a little more than twice NAV (101.2% premium). The premium declined during November from 114.5% due to both an upward revision to NAV and a decrease in share price.
Data Center REITs’ median premium to consensus NAV narrowed sharply from 10.5% to 4.3%, with 4 out of 6 Data Center REITs still trading at an NAV premium of greater than 5%. Mall REIT Taubman Centers (TCO) ended November at the greatest discount to NAV due to a large share price decline from the already deeply discounted price at which it began the month.
Takeaway
The large-cap REIT premium (relative to small-cap REITs) grew larger and larger over the first 10 months of 2019, but declined in November. Even after the multiple gap narrowed last month, investors are still paying on average more than 41% more for each dollar of 2020 FFO/share to buy large-cap REITs than small-cap REITs (20.4x/14.4x - 1 = 41.7%). As can be seen in the table below, there is presently a very strong, positive correlation between market cap and FFO multiple.
This month I am introducing an additional table which also clearly demonstrates the degree to which large-cap REITs are currently expensive relative to their smaller peers. While I have previously highlighted the fact that certain individual REITs trade far above or below their respective NAVs, the table below shows the average premium/discount of REITs of each market cap bucket. This data, much like the data for price/FFO, shows a strong, positive correlation between market cap and NAV premium. Small-cap and mid-cap REITs are on average currently trading very near to their respective NAVs. Micro-cap REITs, however, trade at a discount of nearly 20% while large-cap REITs average a 7.45% premium.
Micro-cap REITs have significantly outperformed their larger peers thus far in 2019 with a remarkable 40.44% return. However, given that many micro-cap REITs still trade well below their respective NAVs, their incredible 2019 run has the potential to extend into 2020. By carefully analyzing REIT data and industry trends, active investors have the opportunity to outperform ETFs.
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
We now offer a way to directly invest in our Proprietary Investment Portfolio Strategy via REIT Total Return, which replicates our activity in client accounts. Total Return client’s brokerage accounts are automatically invested simultaneously and at the same price when we make a trade in the REIT Total Return Portfolio (also known as 2CHYP).
Learn more about our REIT Total Return Portfolio.Simon Bowler, along with fellow SA contributors Dane Bowler and Ross Bowler, is an investment advisory representative of 2nd Market Capital Advisory Corporation (2MCAC), a state-registered investment advisor.Full Disclosure. All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of the specific person. Please see our SA Disclosure Statement for our Full Disclaimer.
Analyst’s Disclosure: I am/we are long CXW & GEO. 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 CXW & GEO and short SAFE. I am personally long CXW and GEO. 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.