The State of REITs: August 2023 Edition
- The REIT sector followed a strong June with further gains in July, averaging a solid +4.37% total return in July.
- Small cap REITs (+5.23%) continued to outperform in July. Large caps (+2.46%) underperformed their smaller REIT peers for the 3rd straight month in July.
- 72% of REIT securities had a positive total return in July with 60.63% in the black year to date.
- Office (+11.03%) and Malls (+7.92%) outperformed other REIT property types in July. Self-Storage (-2.24%) and Advertising (-1.10%) REITs averaged the biggest declines.
- The average REIT NAV discount narrowed from -22.44% to -19.78% during July. The median NAV discount narrowed from -20.48% to -17.37%.
REITs built on June’s strong performance with another +4.37% average total return in July. REITs again outperformed the S&P 500 (+3.2%), Dow Jones Industrial Average (+3.4%) and NASDAQ (+4.1%). The market cap weighted Vanguard Real Estate ETF (VNQ) underperformed the average REIT in July (+2.03% vs. +4.37%), but has outperformed YTD (+5.55% vs. +3.95%). The spread between the 2023 FFO multiples of large cap REITs (17.2x) and small cap REITs (13.5x) narrowed in July as multiples remained flat for large caps and expanded 1.8 turns for small caps. Investors currently need to pay an average of 27.4% more for each dollar of FFO from large cap REITs relative to small cap REITs. 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.
14 out of 18 Property Types Yielded Positive Total Returns in July
77.78% percent of REIT property types averaged a positive total return in July, with a 13.31% total return spread between the best and worst performing property types. Office (+11.07%) and Malls (+7.92%) outpaced the rest of the REIT sector in July. The Office REIT outperformance in July was driven by massive gains from Hudson Pacific Properties (HPP) (+39.10%), SL Green Realty (SLG) (+26.40%) and Vornado Realty Trust (VNO) (+23.93%).
Self-Storage (-2.24%), Advertising (-1.10%), Casino (-0.95%) and Multifamily (-0.49%) were the only property types in the red in July. Extra Space Storage (EXR) (-5.61%) saw the largest decline among Self Storage REITs, falling sharply after posting an earnings miss and downwardly revised FFO/share guidance on August 3rd.
Performance of Individual Securities
Life Storage (LSI) was acquired by Extra Space Storage (EXR) on July 20th. Shareholders of Life Storage received 0.895 shares of EXR for each share of LSI.
Hudson Pacific Properties (HPP) (+39.10%) was the biggest beneficiary of the July Office REIT rebound. Having suffered the deepest price decline of any Office REIT in the first half of the year, HPP saw the largest rebound as that selloff partially reversed in July. Despite outpacing all other REITs in July, HPP remains deeply in the red year to date with a brutal -35.61% total return.
InnSuites Hospitality Trust (IHT) (-15.93%) continues to experience significantly greater share price volatility than their REIT peers, enduring the largest decline of any REIT in July. However, IHT is still the 2nd best performing Hotel REIT in 2023 with a +21.02% total return trailing only Sotherly Hotels (SOHO) (+24.31%).
73.72% of REITs had a positive total return in July with 60.63% in the black year to date. During the first seven months of last year the average REIT had a -10.94% return. During the first seven months of this year the average REIT has performed much better with a +3.95% total return.
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 07/31/2023) to lowest dividend yield.
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 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.
The large cap REIT premium (relative to small cap REITs) narrowed in July and investors are now paying on average about 27% more for each dollar of 2023 FFO/share to buy large cap REITs than small cap REITs (17.2x/13.5x – 1 = 27.4%). 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 NAV 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 (-7.79%) trades at a high single digit discount to NAV, while mid cap REITs (-12.73%) trade at double digit discount. Small cap REITs (-27.57%) trade at a little less than 3/4 of NAV. Micro caps on average continue to trade at less than half of their respective NAVs (-54.09%).
Bankruptcy filings rose in July from already elevated levels in June. The number of bankruptcies in just the first 7 months of 2023 have already surpassed the total bankruptcies for all of 2022. With inflation not yet under control and the Fed signaling that further rate hikes remain very much on the table, the pace of bankruptcies is not likely to taper off yet. As businesses are forced to refinance maturing debt at much higher interest rates or are potentially unable to refinance in a tighter lending environment, the pace of bankruptcies will remain elevated and may continue to accelerate.
Despite an increasingly challenging economic backdrop, the REIT sector has continued to post strong earnings. An analysis by S&P Global Market Intelligence identified that 61.7% of REITs beat on FFO/share in Q2 2023 including an impressive 75% of Office REITs. Self Storage REITs fell short of earnings expectations in Q2 with twice as many missing on earnings than beating.
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Through October 2021, The State of REITs was published exclusively on Seeking Alpha by Simon Bowler, Sector Analyst at 2nd Market Capital Services Corporation (2MCSC). Editions subsequent to October 2021 will be published on this website in addition to other platforms that may include Seeking Alpha. 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 (2MCAC), a Wisconsin registered investment advisor. Simon Bowler is an investment advisor representative of 2MCAC. Any positive comments made by others should not be construed as an endorsement of the author's abilities to act as an investment advisor.
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