The State Of REITs: June 2020 Edition
Summary
- The REIT sector fell back slightly in May, averaging a -0.38% total return.
- Micro cap REITs led with a solid return of 3.83%, while small caps badly underperformed with a -4% return.
- Only 44.44% of REIT securities had a positive total return in May.
- Infrastructure and Casino REITs led all property types in May, while Shopping Centers and Office saw the largest declines.
- Large cap REITs are outperforming small caps by more than 23% year to date.
- This idea was discussed in more depth with members of my private investing community, Retirement Income Solutions. Get started today »
REIT Performance
After May’s -0.38% average total return, the REIT sector has now fallen in 4 out of the first 5 months of 2020. The average REIT has now suffered a painful loss of -27.28% over the first 5 months of 2020. The REIT sector again underperformed the NASDAQ (+6.75%), S&P 500 (+4.53%) and Dow Jones Industrial Average (+4.26%) in May. The market cap weighted Vanguard Real Estate ETF (VNQ) continued to outperform the average REIT in May (+1.73% vs. -0.38%) and has suffered much smaller losses year-to-date (-15.93% vs. -27.28%). The spread between the 2020 FFO multiples of large cap REITs (21.7x) and small cap REITs (10.3x) significantly widened in May as multiples rose an average of 1.1 turns for large caps and fell 3.3 turns for small caps (driven largely by downward 2020 earnings estimate revisions). 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
Micro cap REITs (+3.83%) saw the largest recovery for the 2nd month in a row. Mid caps (+1.18%) and large caps (+0.61%) also continue to recover in May, but small caps (-4.0%) fell sharply. Year to date there has been a very strong correlation between total return and market cap size. Large cap REITs (-11.93%) have thus far in 2020 outperformed micro caps (-38.51%) by more than 2600 basis points.
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
11 out of 20 Property Types Yielded Positive Total Returns in May
55% of REIT property types averaged a positive total return in May, with a 24.61% total return spread between the best and worst performing property types. Infrastructure (+15.69%) and Casinos (+15.22%) had the best average returns. Infrastructure was led by Power REIT (PW), which achieved a stellar 69.72% return in May. This rapid price surge was driven by the acquisition of a greenhouse property in Maine that is used for cannabis cultivation. For the past several years, companies in the cannabis industry have typically been afforded more generous multiples due to expectations for stronger growth.
Shopping Centers (-8.92%) was the worst performing property type in May, giving back about half of the strong gains seen in April. Cedar Realty (CDR) was the worst performing of the shopping center REITs in May (-28.22%) and year to date (-74.0%). Although Cedar performed fairly well relative to peers with regard to rent collection (65%), investors have remained cautious largely due to CDR’s 10x Debt/EBITDA (as of the end of Q1 2020).
Source: Table by Simon Bowler of 2 nd Market Capital, Data compiled from SNL.com. See important notes and disclosures at the end of this article
Infrastructure (+25.18%), Land (+17.74%) and Data Centers (+13.14%) are the only REIT property types that remain in the black after the first 5 months of 2020. Hotels (-52.97%) and Malls (-52.80%) continue to underperform all other property types year to date. 85% of REIT property types have averaged a negative return, with 80% reaching a double-digit negative return 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) fall 0.3 turns during May (from 14.9x down to 14.6x). The average FFO multiples rose for 65% of property types and fell for 35% in May. After a very strong performance in May, Infrastructure (25.8x) now trades at the highest average multiple of all property types followed by Manufactured Housing (25.6x). Malls (4.6x), Corrections (5.5x) and Shopping Centers (7.7x) are the only property types trading at a single digit 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
Single Family Housing REIT Front Yard Residential (RESI) had the lowest total return (-34.27%) of all REITs in May despite reporting stellar rent collection (more than 99% in April). This minimal impact from the coronavirus and government imposed lockdowns, however, was overshadowed by the news that Amherst was terminating it’s agreement to acquire RESI for $2.3B. Although RESI received a modest termination fee, it paled in comparison to the benefit shareholders would have received for being acquired at the terms in the agreement.
Infrastructure REIT Power REIT (PW) significantly outperformed the REIT sector yet again in May with an impressive +69.72% return. The degree to which Power REIT has outperformed the rest of the REIT sector in 2020 is remarkable. Year to date Power REIT has achieved a +159.67% total return, dwarfing the +36.83% of the 2 nd best performer, Safehold (SAFE). Power REIT stands out even more when compared with other Micro Cap REITs, of which only 3 out of 29 are positive year to date. Outside of PW, the only other micro caps in the black YTD are Farmland Partners (FPI) with +2.61% and Postal Realty Trust (PSTL) with +2.18%. Excluding PW, the average Micro Cap REIT is down 45.59% in 2020.
44.44% of REITs had a positive return in May, but only 12.15% are in the black year to date. During the first 5 months of last year, the average REIT had a solid +17.22% return, whereas this year the average REIT has seen a disappointing total return of -27.28%.
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 05/31/2020) 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 May 31st, 2020
The REIT sector median discount to Net Asset Value narrowed in May from -23.9% to -20.1%.
Data Centers began the month of May at a median NAV premium of 14%, but closed the month at a 26.9% premium. The only two other property types that ended May with a median NAV premium are Self Storage (4%) and Industrial (2.5%). Malls (-54.7%) and Shopping Centers (-44.8%) yet again finished the month at the largest NAV discounts, reflecting the elevated fear investors have of further NAV declines due to the disproportionately severe impact of government lockdowns on brick-and-mortar retail. Despite underperforming the average REIT by nearly 500 basis points in May, Safehold (SAFE) (+65.1% premium) continues to trade at the largest premium to NAV among all REITs. Mall REIT Macerich (MAC) remains at the largest discount to NAV (-73.9%) even after their consensus NAV was revised downward again during May to $26.06/share from $32.58/share.
REIT Premium/Discount to NAV by Property Type
Below is a downloadable data table, which ranks REITs within each property type from the largest discount to the largest premium to NAV. The consensus NAV used for this table is the average of analyst NAV estimates for each REIT. Both the NAV and the share price will change over time, so I will continue to include this table in upcoming issues of The State of REITs with updated consensus NAV estimates for each REIT for which such an estimate is available.
For the convenience of reading this table in a larger font, the table above is available as a PDF as well.
Takeaway
The large cap REIT premium (relative to small cap REITs) significantly increased during 2019 and further expanded during each of the first three months of 2020. Although this trend sharply reversed in April, it returned in May as the multiple spread dramatically widened. Investors are now paying on average more than twice as much for each dollar of 2020 FFO/share to buy large cap REITs than small cap REITs (21.7x/10.3x - 1 = 110.7%). As can be seen in the table below, there is presently a strong, positive correlation between market cap and FFO multiple.
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 Price/NAV. Large cap REITs are on average currently trading at a slight discount (-3.39%) to their respective NAVs. Mid cap (-11.23%) and small cap REITs (-25.47%) trade at a moderate average discount, whereas micro caps average a staggering -54.07% discount to NAV.
More than ever before investors are closely watching rent collection rates for each REIT. Due to the disproportionate impact than the government-imposed lockdowns and the coronavirus itself have had on certain property types, rent collection rates have widely varied since the beginning of the pandemic. Even within a given property type, tenant quality has also played a major role in the percent of rents that a REIT is able to collect. Tenants which have strong balance sheets and ample liquidity are able to withstand a temporary disruption (such as this lockdown) and continue to pay rent in full and on time. Tenants with poor balance sheets and limited access to capital markets, however, may be unable to pay rent and some will even be unable to remain solvent, resulting in an increase in the REIT’s vacancy rate.
Tenant type has also played a major role. For many years Whitestone REIT (WSR) has touted the benefits of their disproportionately service-oriented tenant base, given that it helped shield them from the negative impact on brick-and-mortar retail of the rise of e-commerce. However, even though people can’t get a haircut or manicure through e-commerce, they also can’t get these services through brick-and-mortar when state governors mandate that barbershops and salons must remain closed. These government lockdowns significantly contributed to the dismal 40% rent collection by Whitestone in May.
Another factor that has proven to be of tremendous importance during this downturn is the structure of contract that landlords have with tenants. Hotels, which sign contracts for as little 1 night with tenants, saw the downturn immediately impact cash flows. Long-term triple net contracts, however, have proven to be far more effective at protecting the landlord even when the tenant is badly suffering. Casinos around the country have been shutdown and only been allowed to operate at significantly reduced capacity upon re-opening, which has materially hurt their profitability. The REIT landlords of these casinos, however, haven’t felt any of this impact. VICI Properties (VICI) and MGM Growth Properties (MGP) have continued to collect 100% of rent despite the severe impact to their tenants.
The rent collection figures that many REITs are now publishing monthly provide incredibly valuable updates that allow investors to make more informed investment decisions in a uniquely uncertain environment. By carefully analyzing REIT data and industry trends, active investors have the opportunity to outperform ETFs.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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 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 MAC & FPI. 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 MAC & FPI. 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.
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