The State Of REITs: March 2022 Edition

Mar. 21, 2022 12:16 PM ETAPTS, BX, HST, IHT, ILPT, IRT, PW, RTL, SBAC, UNIT, VICI, VNQ1 Comment9 Likes

Summary

  • The REIT sector failed to bounce back after a brutal January, as REITs only managed a -0.27% average total return in February.
  • Micro cap (+3.87%), mid cap (+0.37%) and small cap REITs (+0.13%) outperformed, whereas large caps (-3.41%) continued to suffer heavy losses.
  • Only 39.66% of REIT securities had a positive total return in February.
  • Hotel (+6.52%) and Diversified (+5.31%) outperformed all REIT property types in February. Infrastructure (-9.29%) and Health Care (-7.45%) REITs badly underperformed.
  • The average REIT NAV discount widened from -7.27% to -9.96% during February. The median NAV discount also widened from -5.7% to -8.86%.
  • This idea was discussed in more depth with members of my private investing community, Portfolio Income Solutions. Learn More »

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REIT Performance

After a sharp selloff in January (-5.66%), the REIT sector continued to decline in February (-0.27%) albeit at a slower pace. REITs handily outperformed the broader market in February as the S&P 500 (-3.0%), the Dow Jones Industrial Average (-3.3%) and NASDAQ (-3.3%) all endured steeper declines. The market cap weighted Vanguard Real Estate ETF (VNQ) significantly underperformed the average REIT in February (-3.48% vs. -0.27%) and has a YTD performance nearly twice as bad as the average REIT (-11.61% vs. -5.85%). The spread between the 2022 FFO multiples of large cap REITs (21.8x) and small cap REITs (16.3x) narrowed in February as multiples decreased by 0.9 turns for large caps and increased by 0.2 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.

REIT Returns February 2022

Data compiled from S&P Global Market Intelligence LLC

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

Micro cap (+2.16%) REITs outperformed again in February as small cap (+0.13%) and mid cap (+0.37%) REITs narrowly closed out the month in the black. Large caps (-3.41%) underperformed their smaller peers again in February and now average a double-digit negative return in 2022. Small cap REITs (-5.63%) are outperforming large caps (-10.29%) by 466 basis points on YTD 2022 total return.

REIT Returns YTD February 2022

Data compiled from S&P Global Market Intelligence LLC

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

8 out of 19 Property Types Yielded Positive Total Returns in February

42% of REIT property types averaged a positive total return in February, with a 15.81% total return spread between the best and worst performing property types. Infrastructure (-9.29%) and Health Care (-7.45%) REITs had the lowest average total return in February. Although fiber REIT Uniti Group (UNIT) (+7.55%) performed well in February, the other infrastructure REITs were all deep in the red, ranging from SBA Communications' (SBAC) -6.78% to Power REIT's (PW) -22.81% return.

Hotel (+6.52%) and Diversified (+5.31%) REITs led all property types in February. Much like in January, the Hotel sector's average total return was pulled sharply upward by the +32.43% return of InnSuites Hospitality Trust (IHT), which has significantly outpaced all REITs YTD with a remarkable +80.42% return over the first 2 months of the year.

REIT Performance February 2022

Data compiled from S&P Global Market Intelligence LLC

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

Hotel (+6.27%) and Office REITs (+1.62%) have outperformed all other property types over the first two months of the year and are the only property types in the black YTD. Property types that entered 2022 at sky-high multiples have taken a beating at the start of the year. Infrastructure (-17.10%), Industrial (-14.89%), Manufactured Housing (-14.52%) and Single Family Housing (-14.52%) have suffered the largest average losses.

REIT Performance YTD 2022

Data compiled from S&P Global Market Intelligence LLC

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 (2022) decline 0.3 turns in February (from 17.5x down to 17.2x). The average FFO multiples rose for 22.2% and declined for 77.78% of property types in February. There are no recent 2022 FFO/share estimates for either of the Advertising REITs. Land (32.7x) and Industrial REITs (27.7x) continue to experience multiple compression, but remain at higher average multiples than all other REIT property types. Mall REITs (7.8x) are the only property type currently trading at a single digit multiple.

REIT FFO Multiple by Property Type

Data compiled from S&P Global Market Intelligence LLC

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

Industrial REIT Monmouth Real Estate Investment Corporation (MNR) was acquired by Industrial Logistics Properties Trust (ILPT) on February 28th. MNR was purchased for $21/share in all cash.

Preferred Apartment Communities (APTS) (+51.44%) will be acquired by Blackstone (BX) for $25/share in an all cash offer expected to close in the 2nd quarter of 2022. This attractive valuation sent the share price soaring and helped APTS to be the best performing REIT in February.

Power REIT (PW) (-22.81%) was the worst performing REIT in February, but has only given up a small portion of the enormous 158.11% run up in share price the Infrastructure REIT achieved in 2021. This decline was not fueled by any major company news, but rather was merely part of the trend thus far this year in which the REITs and property types that have the most inflated valuations or saw the biggest run ups in 2021 are being aggressively sold off in 2022.

Only 39.66% of REITs had a positive return in February with 21.14% in the black year to date. During the first two months of last year the average REIT had a +10.18% return, whereas this year the average REIT has seen modest -5.83% decline.

REIT Data 1

Data compiled from S&P Global Market Intelligence LLC

REIT Data 2

Data compiled from S&P Global Market Intelligence LLC

REIT Data 3

Data compiled from S&P Global Market Intelligence LLC

REIT Data Source

Data compiled from S&P Global Market Intelligence LLC

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 02/28/2022) to lowest dividend yield.

REIT Dividends 1

Data compiled from S&P Global Market Intelligence LLC

REIT Dividends 2

Data compiled from S&P Global Market Intelligence LLC

REIT Dividends 3

Data compiled from S&P Global Market Intelligence LLC

REIT Dividends 4

Data compiled from S&P Global Market Intelligence LLC

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.

REIT Dividends Monthly

Data compiled from S&P Global Market Intelligence LLC

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.

REIT NAV Data 1

Data compiled from S&P Global Market Intelligence LLC

REIT NAV Data 2

Data compiled from S&P Global Market Intelligence LLC

REIT NAV Data 3

Data compiled from S&P Global Market Intelligence LLC

REIT NAV Data 4

Data compiled from S&P Global Market Intelligence LLC

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) narrowed again in February, but investors are still paying on average about 34% more for each dollar of 2022 FFO/share to buy large cap REITs than small cap REITs (21.8x/16.3x - 1 = 33.7%). As can be seen in the table below, there is presently a strong positive correlation between market cap and FFO multiple.

REIT FFO Data by Market Cap

Data compiled from S&P Global Market Intelligence LLC

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 (-0.64%) trades at approximately consensus NAV, while mid cap REITs (-10.28%) and small cap REITs (-13.76%) trade at a double-digit discount. Micro caps on average trade at less than 2/3 of their respective NAVs (-33.93%).

REIT NAV Data by Market Cap

Data compiled from S&P Global Market Intelligence LLC

In February, REITs acquired 106 properties (excluding mergers), an increase over January. When measured in dollars, REITs more than doubled their January acquisition volume with about $6.11B spent on property purchases (excluding mergers). REIT February 2022 acquisition spending also significantly increased year over year.

REIT Property Acquisitions

S&P Global Market Intelligence LLC

VICI Properties (VICI) spent $4B on the purchase of The Venetian Resort and the Venetian Expo in Las Vegas in February, significantly outpacing the acquisition spending of all other REITs. Necessity Retail REIT (RTL) acquired the most properties, however, picking up 55 in February.

REIT Property Acquisitions

S&P Global Market Intelligence LLC

As REITs ramped up the acquisition volume in February, they simultaneously ramped down their disposition volume. In total, REITs only disposed of 9 properties for $508 million.

REIT Property Dispositions

S&P Global Market Intelligence LLC

The largest disposition of February was Host Hotels & Resorts' (HST) sale of the Sheraton Boston Hotel for $233M. Independence Realty Trust (IRT), however, sold off the largest number of properties as they disposed of 3 properties for $126M.

REIT Property Dispositions

S&P Global Market Intelligence LLC

Acquisitions and dispositions of properties can be utilized as useful tools to improve portfolio quality and profitability. However, the announcement of such a transaction is not inherently good news. It is important to analyze each transaction for whether it successfully contributes to the execution of an effective strategy (for example: rotating the property portfolio out of weak markets and into ones that are growing rapidly) and whether it is accretive or dilutive to earnings. Buying a property likely will not contribute to earnings growth if the buyer significantly overpays. How property transactions are executed reveals a lot about a REIT's quality of management and provides valuable insight into whether a REIT represents an attractive investment opportunity.

Dividends are scarce, we provide the solution

For everything you need to build a growing stream of dividend income, please consider joining Portfolio Income Solutions. As a member you will get:

  • Access to a curated Real Money REIT Portfolio
  • Continuous market and single stock analysis
  • Data sets on every REIT

You will benefit from our team’s decades of collective experience in REIT investing. On Portfolio Income Solutions, we don’t only share our ideas, we also discuss best trading practices and help you become a better investor.

This article was written by

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Simon Bowler is a Sector Analyst at 2nd Market Capital Services Corporation (2MCSC). 2MCSC was formed in 1989 and 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. a Wisconsin registered investment advisor.



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Disclosure: I/we have a beneficial long position in the shares of UNIT 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. I have no business relationship with any company whose stock is mentioned in this article.

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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.

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