The State Of REITs: October 2021 Edition

Summary

• REITs achieved positive total returns in each of the first 8 months of 2021, but that streak snapped in September with a -2.87% average return.
• Micro-cap REITs (+1.99%) bounced back in September, while large caps suffered heavy losses (-5.42%).
• Fewer than a quarter (23.46%) of REIT securities had a positive total return in September.
• Hotel, Advertising, and Office REITs were the only property types in the black in September. Land and Single-Family Housing REITs saw the biggest share price drops.
• The average REIT NAV premium flipped to a discount of -5.24% in September. The median premium also became a discount of -2.63% during the month.
• This idea was discussed in more depth with members of my private investing community, Portfolio Income Solutions. Learn More »

anyaberkut/iStock via Getty Images

REIT Performance

The REIT sector's 8-month winning streak in 2021 came to an end with a -2.87% average total return in September. This September REIT pullback, however, was much more modest than that of the broader market. The NASDAQ (-5.31%), S&P 500 (-4.76%), the Dow Jones Industrial Average (-4.29%) all suffered more significant declines. The market cap weighted Vanguard Real Estate ETF (VNQ) badly underperformed the average REIT in September (-5.68% vs. -2.87%) and has now fallen behind the YTD performance of the average REIT (+22.15% vs. +28.59%). The spread between the 2021 FFO multiples of large cap REITs (23.9x) and small cap REITs (18.3x) significantly narrowed in September as multiples fell 1.8 turns for large caps, but rose 1.9 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 S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article

Large cap REITs (-5.42%) had a very rough month is September, underperforming their smaller peers. Mid caps (-3.95%) and Small caps (-1.62%) also dropped back, albeit not as severely. Micro cap REITs (+1.99%), however, weathered the September market downturn very well. Large cap REITs (+26.43%) fell nearly 100 basis point behind small caps (+27.35%) on YTD 2021 total return.

Source: Graph by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article.

Only 3 out of 20 Property Types Yielded Positive Total Returns in September

15% of REIT property types averaged a positive total return in September, with a narrow 11.28% total return spread between the best and worst performing property types. Land (-8.14%) and Single Family Housing (-7.90%) saw the biggest losses in September, but both have still achieved above average YTD gains of 32.66% and 29.53% respectively. The share price declines in September were heaviest in the highest FFO multiple property types, such as Land, Manufactured Housing, Industrial and Single Family Housing as investors began to reassess sky-high multiples ahead of increasingly likely Fed rate hikes next year.

Hotel (+3.14%) and Advertising (+1.18%) REITs led all property types in September. Hotels were pulled up by the +18.94% return of Condor Hospitality Trust (CDOR), which announced on September 23rd that it reached an agreement to sell all 15 of its hotels to Blackstone (BX) for $305M in cash. The transaction is expected to close in the 4th quarter, and net proceeds will be distributed to CDOR shareholders through one or more liquidating distributions.

Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article

Malls (+82.58%), Shopping Centers (+49.23%) and Self Storage (+42.88%) have outperformed all other property types over the first three quarters of the year. Corrections is only REIT property type in the red year to date (-13.17%). Health Care REITs continued to see falling share prices in September and have now sunk to only a low single-digit average total return in 2021 (+4.34%).

Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article

The REIT sector as a whole saw the average P/FFO (2021) decline 0.7 turns in September (from 18.7x down to 18.0x). The average FFO multiples rose for 10% and declined for 85% of property types in September. There are no recent 2021 FFO/share estimates for either of the Advertising REITs. Multiples for Land (43.6x), Manufactured Housing (29.1x) and Industrial (28.5x) narrowed in September, but these property types continue to trade at the highest multiples. Hotel (1.6x) multiples fell by 2.7 turns in September and is now lower than all other property types. Corrections (3.7x) and Mall (5.0x) REITs are the only other property types still trading at a single digit multiple.

Source: Table by Simon Bowler of 2nd Market Capital, Data compiled from S&P Global Market Intelligence LLC. See important notes and disclosures at the end of this article.

Performance of Individual Securities

CBL Properties (CBLAQ), a regional mall REIT which is currently going through the bankruptcy process, outperformed all other REITs in September with a +41.55% gain. This brings CBL's total return over the first three quarters of the year up to +343.40%. These huge 2021 returns come after years of the share price freefalling as regional mall fundamentals collapsed and CBL was eventually dealt a death blow by the government mandated lockdowns. However, it appears that current CBL common and preferred shareholders will not be wiped out, but rather will get to participate (in a greatly reduced capacity) in the new equity post-bankruptcy. The share price has continued to move upward as investors have attempted to determine the value of new equity that will be awarded to current shareholders in exchange for the current shares they own that will be eliminated as CBL emerges from bankruptcy.

The worst performing REIT in September was also a mall REIT currently going through the bankruptcy process, Washington Prime Group (OTC:WPGGQ) with a -45.86% return. Although Washington Prime's share price was already badly beaten down due to the Chapter 11 filing, it suffered further losses in September after announcing that the company will delist common and preferred shares from the NYSE and will no longer be publicly traded after emerging from Chapter 11. Driven by this impending loss of liquidity, investors fled for the exits while they are still open.

23.46% of REITs had a positive return in September with 85.71% in the black year to date. During the first nine months of last year, the average REIT had a dismal -24.93% return, whereas this year the average REIT has seen an impressive total return of +25.73%.

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 09/30/2021) 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.

Valuation

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 2020. However, it has significantly narrowed during 2021. Investors are now paying on average about 30% more for each dollar of 2021 FFO/share to buy large cap REITs than small cap REITs (23.9x/18.3x - 1 = 30.6%). As can be seen in the table below, there is presently a 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. The average large cap REIT (+6.42%) trades at a single-digit premium to consensus NAV and mid cap REITs (-3.81%) on average trade at single-digit discounts. Small cap REITs (-12.48%) trade at a double-digit discount, whereas micro caps on average trade at less than three quarters of their respective NAVs (-25.90%).

After a massive wave of dividend cuts and suspensions in 2020 amid the Covid-19 pandemic and government-imposed lockdowns, REITs have begun raising dividends again in 2021. In total there have already been 75 dividend hikes in the first 3 quarters of 2021. Although we have seen the most dividend increases from retail REITs, the property type with the highest percent of REITs raising their dividend is Industrial with a whopping 71.4% increasing cash flow to investors. One property type has notably not yet seen a dividend increase: Hotels. While fundamentals have largely recovered for most property types, the Hotel sector is still far from making a full recovery and thus is not well-positioned to restore or increase dividend payouts to shareholders.

Some of these dividend increases have been a continuation of the same slow and steady <1% dividend increases that these REITs were doing prior to the pandemic, such as the recent 0.2% increases by Realty Income (O) and W. P. Carey (WPC). Some REITs that had previously cut or suspended their dividends have begun hiking their dividends back up toward their 2019 dividend level, such as Armada Hoffler (AHH) which has through 3 dividend hikes so far in 2021 raised their dividend back up from $0.00 to $0.16/share. Some of the large dividend hikes in 2021, however, are from REITs that never cut their dividend such as Extra Space Storage (EXR), which has raised their dividend 25% in 2021, or from Prologis (PLD), which raised their dividend 8.6%.

The most important metric in investing success is not price return, but rather total return. If the price of a security rises, investors attain a positive price return. If a stock pays a dividend, the investor will also receive a positive return from the distribution. As a result, REITs that continue to raise their dividend over time can provide their investors with a growing income component to their total return even if the share price remains flat. A higher dividend yield has been one of the key drivers to REITs outperforming the broader market over the long run.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of WPC, PLD, AHH either through stock ownership, options, or other derivatives. 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.

All articles are 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 any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles. It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past Performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Commentary may contain forward-looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCSC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article. S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P 2nd Market Capital Services Corporation(2MCSC) provides investment research and consulting services to the financial services industry and the financial media. 2MCSC does not provide investment advice. 2MCSC is a separate entity but related under common ownership to 2nd Market Capital Advisory Corporation (2MCAC), a Wisconsin registered investment advisor. Simon Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

Comments

[Morgan Myrmo]

Simon,
I always appreciate your work regarding REITs! Of course the data is a few weeks old, yet it remains useful and as usual, a fun read.
-Morgan

[Daleem]

Useful data here & thanks.
BTW, I think EPR is monthly pay too.

[buffalobobz]

insightful ty

[1.21 Jigawatts]

Useful info, thank you!

[Bhamman]

Great data. Thank you!