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The State Of REITs: April 2020 Edition



  • The REIT sector plummeted in March, suffering a -28.79% average total return.
  • Micro-cap and Small-cap REITs severely underperformed their larger peers during the March selloff.
  • 93.33% of REIT securities had a negative total return in March.
  • Land and Data Center REITs led all property types in March, while Malls and Hotels saw the most severe declines.
  • 95.2% of small cap REITs trade at a Price/FFO discount to the average large cap REIT.
  • This idea was discussed in more depth with members of my private investing community, Retirement Income Solutions. Get started today »

REIT Performance

The coronavirus-induced stock market collapse, which began on February 24th, accelerated during March and sent stocks dramatically lower. The REIT sector saw even more severe losses than the broader market. After suffering back to back declines in January and February, the average REIT fell much further in March with a total return of -28.79%. This amounts to a devastating first quarter loss of -33.39%. The REIT sector badly underperformed the NASDAQ (-10.12%), S&P 500 (-12.51%) and Dow Jones Industrial Average (-13.74%) in March. The market cap weighted Vanguard Real Estate ETF (VNQ) massively outperformed the average REIT in March (-19.42% vs. -28.79%) and has suffered much smaller losses year-to-date (-24.16% vs. -33.39%). The spread between the 2020 FFO multiples of large cap REITs (18.9x) and small cap REITs (9.2x) significantly widened in March as multiples fell an average of only 1.3 turns for large caps and a staggering 2.9 turns for small 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

Although REITs of all sizes performed poorly in March, micro-cap REITs (-42.95%) saw by far the largest declines. Large cap (-15.73%) and mid cap REITs (-21.18%) averaged significantly less severe losses than their smaller peers. Large cap REITs continue to outperform year to date, averaging a first quarter return of (-18.52%), which is less than half the losses seen by micro-caps (-42.95%) and small caps (-39.97%).

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 early access to The State of REITs and more of our research, data and analysis as well as access to our two real-money high yield REIT portfolios, you can subscribe to a free 14-day trial to our Seeking Alpha marketplace: 2MC Retirement Income Solutions.

This article was written by

Simon Bowler profile picture

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 QTS, SPG, CONE, MAC & NXRT. 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 QTS, SPG, CONE, MAC & NXRT. 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 (16)

Nice tables.
bluescorpion0 profile picture
Which 3 REITs have the most passionate , intelligent CEOs?
LadyKathy profile picture
NXRT has the best management.
deanmortensen profile picture
Thanks for that impressive overview of the equity reit universe. I think beaten-down mortgage reits are also worth a look. I believe that this coronavirus pandemic will cause interest rates to plummet. In fact, the Fed has already cut the Fed funds rate to zero. Mortgage rates are trending lower, and will continue to fall further. The Fed has flooded the banking system with cash, and is now launching lending facilities to support various corners of the financial system, including corporate bonds, residential and commercial mortgages, municipal bonds, and even lower-rated corporate bonds. These Fed actions will lower spreads for various securities.

It is apparent to me that in the current low interest rate environment, in which banks pay almost zip on deposits and CDs, investors will intensify their search for yield. At the same time, as "shelter-in-place" orders and social distancing edicts cause the US and global economy to crumble, many corporations are slashing their dividend payouts. This will further fuel the search for stock shares and bonds that pay a steady, predictable dividend. Even if the administration is able to begin to ease restrictions, and gradually open up the economy, the unemployment rate is likely to spike above 15%, and GDP will likely decline at a 25%+ annual rate this year. The economic damage will take years to heal, and the Fed will keep interest rates low for years to promote that healing process. This suggests to me that investors will increasingly prize investments such as some reits that pay a steady, predictable dividend, and will be willing to pay a premium to own their shares. For those reits that can continue steady, predictable dividend payouts without interuption, their shares will eventually trade at much higher than historical P/E ratios as this weak economy limps along for many quarters. I believe that shares of mortgage reits that own mostly agency securities are particularly well-positioned in the current environment of falling interest rates and a weak economy.
mREITs profile picture
Good article mate!
SA-NJ52 profile picture
The author writes...

"Until REITs announce the amount of rent concessions made, changes to occupancy and whether they have been able to successfully remain within the limitations of their debt covenants, investors will be operating with a partial data set."

I have some limit orders in on selected REITs. I will wait for a better entry point.

One of the best REIT analysis published on SA. Thank you so much for your presentation of objective data and refraining from using fairy tales and storytelling like the self anointed celebrity REIT writer who is mainly just pushing subscription sign ups instead.
Simon Bowler profile picture
Thank you, buddybobby. I agree with you that there is value in presenting objective data. I believe that people can benefit from having access to as much information as possible and utilizing it to make the decisions that make the most sense to achieve their personal investment goals.
milbank profile picture
Fantastic article, Simon. Thanks for all the charts. This makes for a great reference article.
Simon Bowler profile picture
Thank you, milbank. I'm happy to hear that it was helpful for you.
bluescorpion0 profile picture
I'm rather confused about the categorization of REITs as there is huge overlap.
Triple net can be shopping mall or diversified.
Diversified can including shopping center or triple net.
Mall and shopping center seem similar.
Why don't we just lump the entire thing as retail??
Triple net is just a type of lease not a category!
Simon Bowler profile picture
You are correct that triple net is a type of lease. Triple Net REITs are a category of REITs that utilize this approach to sign long leases that provide fixed and predictable cash flows to the REIT. Other REITs may utilize some mix of triple net leases, gross leases and modified gross leases. Given that Triple Net REITs are focused specifically on this more predictable cash flow structure, they are insulated from property-level variable costs.

There are, of course, multiple different ways in which REITs could be classified. You are correct that a free-standing single tenant triple net property, a grocery-anchored shopping center and an enclosed regional mall are all within the broad category of retail. However, there are meaningful differences between them regarding rent per square foot, tenant mix, cap rate and leasing terms.

I could certainly have bundled all similar property types into a single category as you have suggested. Not discerning between different property types and simply providing one data point for all of them would definitely save me a great deal of time in compiling this data and in writing the report. However, I think that doing so would provide significantly less useful information to investors who do wish to discern between different types of retail REITs for example. You may find shopping centers and malls to be similar, but other investors may benefit from data that is exclusive to each individual property type.
bluescorpion0 profile picture
Mark Roussin profile picture
Great information Simon! A lot of high-quality REITs, especially in the small and mid-cap range that are trading at HUGE discounts, but like you said, it is hard to know the full impact until we hear from the individual REITs. I really like MPW and DOC and I am looking at a couple industrial REITs right now. Best of luck to you!
Simon Bowler profile picture
Thank you, Mark. Very well said. I agree with you that some of these small and mid cap REITs (including MPW, which I am long) trading at big discounts certainly do seem to be a rare opportunity. We will soon get some further information on the impact of the present crisis on individual REITs and that should provide much needed clarity as to the degree to which each particular REIT is truly discounted. Best of luck to you as well!
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