The State of REITs: September 2020 Edition
- After suffering losses in five of the first seven months of the year, the REIT sector bounced back in August, averaging a +3.16% total return.
- Small-cap REITs led with a strong return of +4.86%, while large caps saw much smaller gains with an average return of only +0.69%.
- 58.89% of REIT securities had a positive total return in August.
- Hotel and Advertising REITs led all property types in August, while Infrastructure and Student Housing saw the biggest declines.
- Large-cap REITs have outperformed small caps by 25.6% over the first eight months of 2020.
With August’s +3.16% average total return, the REIT sector has now seen monthly gains in three of the first eight months of 2020. Year to date, REITs have suffered an average loss of -22.00%. The REIT sector underperformed the NASDAQ (+9.59%), S&P 500
(+7.01%) and Dow Jones Industrial Average (+7.57%) in August. The market cap weighted Vanguard Real Estate ETF (VNQ) underperformed the average REIT in August (+0.44% vs. +3.16%), but has endured much smaller losses year to date (-10.37% vs. -22.00%). The spread between the 2020 FFO multiples of large-cap REITs (22.5x) and small-cap REITs (7.6x) widened in August as multiples rose an average of 0.2 turns for large caps and declined 1.1 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
Small-cap (+4.86%) and micro-cap REITs (+3.45%) saw the strongest recovery in August. Large caps (+0.69%) and mid caps (+2.24%) underperformed their smaller peers in August. Year to date, there has been a very strong correlation between total return and market cap size. Large-cap REITs (-5.38%) have thus far in 2020 outperformed micro caps (-35.97%) by more than 3,000 basis points.
16 out of 20 Property Types Yielded Positive Total Returns in August
80% of REIT property types averaged a positive total return in August, with a 16.62% total return spread between the best- and worst-performing property types. Hotels (+11.92%) and Advertising (+11.41%) had the best average returns. 15 out of 18 hotels were in the black in August and 13 were up double digits, led by Hersha Hospitality (NYSE:HT) and Chatham Lodging (NYSE:CLDT) with +35.08% and +32.82% gains respectively. Despite a very strong August, however, hotel REITs all remain at deeply depressed prices, ranging from -20.27% for InnSuites Hospitality Trust (NYSEMKT:IHT) to -88.96% for Ashford Hospitality Trust (NYSE:AHT) thus far in 2020. Covid-19 fears continue to weigh very heavily on the hotel industry, severely dampening leisure and business travel and decimating event bookings. Corporate events, conventions, weddings, and the vast majority of other large gatherings have been postponed or canceled. Due to uncertainty as to when it will be safe to hold events in the future and the amount of planning and lead time these kinds of events require, this dearth of event bookings is likely to impact the industry well into the future.
Infrastructure (-4.71%) was the worst-performing property type in August, weighed down by the -21.63% return of Power REIT (NYSEMKT:PW). This drop back in PW’s share price was not fueled by any news released in August, but rather was just a minor pullback from an exceptional rally. Even after August’s decline Power REIT is still up 126.11% YTD, far more than any other REIT.
Data Centers (+22.66%), Land (+21.24%) Infrastructure (+20.83%), Industrial (+9.73%), and Self Storage (+0.21%) are the only REIT property types that remain in the black after the first eight months of 2020. Hotels (-53.53%) and Malls (-52.67%) continue to badly underperform all other property types in 2020. 75% of REIT property types have averaged a negative return, with 55% reaching a double-digit negative return thus far this year.
The REIT sector as a whole saw the average P/FFO (2020) rise 0.5 turns during August (from 13.3x up to 13.8x). The average FFO multiples rose for 70% of property types, fell for 25%, and held steady for 5% in August. Manufactured Housing (27.7x) overtook Infrastructure (24.5x) as the property type trading at the highest average multiple. Hotels (-4.0x) are trading at a negative FFO multiple as the hotel sector struggles to recover as the Covid-19 pandemic continues. Malls (5.3x), Corrections (5.7x) and Shopping Centers (8.8x) are the only property types trading at a positive single-digit multiple.
Performance of Individual Securities
Diversified REIT Medalist Diversified REIT (NASDAQ:MDRR) had the lowest total return (-24.13%) of all REITs in August, continuing the sharp downward trend that it has suffered since its 2018 IPO. MDRR has not yet reinstated the dividend that was suspended earlier this year, is very highly leveraged, and due to a high cost of capital, is not well-positioned to make accretive acquisitions or developments. MDRR is now down -61.08% YTD and -86.95% since IPO.
Shopping Center REIT Wheeler REIT (NASDAQ:WHLR) significantly outperformed the REIT sector in August with a tremendous +52.97% return. This upward surge in share price brings WHLR to a +72.56% YTD return, which is second only to Power REIT’s remarkable 126.11% YTD return. After reporting Q2 2020 earnings on August 4th, the share price soared as FFO/share recovered to $0.12/share up from just $0.01/share in Q1. Wheeler remains a severely indebted and troubled company, but this less-bad-than-expected quarter helped the stock to partially recover. Despite the strong 2020 share price rebound, WHLR still only trades at a share price 73% lower than where it was just three years ago.
58.89% of REITs had a positive return in August and only 23.20% are in the black year to date. During the first eight months of last year, the average REIT had a strong +21.64%return, whereas this year the average REIT has seen a disappointing total return of
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 08/31/2020) 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.
NAV Data as of August 31st, 2020
The REIT sector median discount to Net Asset Value narrowed yet again in August from -14.2% to -12.2%.
Data Center REITs continue to trade at the largest premium to NAV despite seeing their median NAV premium narrow slightly from +29.1% to 27.1% during August. Health Care and Casino REITs began the month of August trading at a median discount to NAV, but finished the month at premiums of +4.8% and +0.2% respectively. Shopping Centers (-39.1%) have overtaken Malls (-38.6%) as the property type trading at the largest NAV discount. This is primarily the result of downward revisions to NAV estimates for Mall REITs. Community Healthcare Trust (NYSE:CHCT) saw modest increases in share price and consensus NAV during August and continues to trade at the largest premium (+83.3%) of all REITs.
Office REIT Empire State Realty Trust (NYSE:ESRT) is now trading at the largest discount to consensus NAV of any REIT (-61.2%). ESRT overtook Macerich (NYSE:MAC) as the most discounted REIT after Macerich’s share price ticked up modestly and consensus NAV was revised sharply downward in August (from $23.20 down to $20.24. Fellow New York office REITs Paramount Group (NYSE:PGRE) and SL Green (NYSE:SLG) are also among the most heavily discounted at -60.4% and -52.7% respectively. New York City continues to suffer from a particularly strict and long-lasting government-imposed lockdown.
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. A statistical anomaly arose in the data this month and is reflected in this table. The NAV discount of PEI at the end of August was -134.81%, which is mathematically accurate when applying the traditional NAV premium/discount formula, but actually reflects a substantial premium given that PEI now has a negative consensus NAV and positive share price.
The large-cap REIT premium (relative to small cap REITs) significantly increased during 2019 and has further expanded during the first eight months of 2020. Investors are now paying on average over 2.9 times as much for each dollar of 2020 FFO/share to buy large-cap REITs than small-cap REITs (22.5x/7.6x – 1 = 193.4%). Excluding hotels, whose earnings have been decimated by both the government-imposed economic shutdown as well as fears of the coronavirus, the small-cap REIT average FFO multiple is 10.8x and the large-cap REIT premium is % (22.5X/10.8X – 1 = 108.3%). 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. The average large-cap REIT (+4.01%) continues to trade at a premium to NAV. Mid-cap REITs (+0.23%) are trading at a premium to NAV for the first time since January. Small-cap REITs (-18.13%) trade at a moderate average discount, whereas micro caps average a staggering -44.20% discount to NAV.
It’s clear that the retail and hotel sectors of the REIT market were hit disproportionately hard by the pandemic and the government lockdowns. With the number of retail bankruptcies YTD far surpassing that of any recent year and Q2 hotel occupancy rates at an all-time low, there is serious concern regarding the future of these sectors.
As the US economy has started to recover and extreme lockdown policies have been scaled back or eliminated, however, both sectors have begun to see fundamentals meaningfully improve in recent months and Q3 earnings are expected to be markedly better than they were in Q2. Retail sales rose for the third straight month in August and STR reported that Hotel occupancy bounced back up to 48.2% during the last full week of August (the week ending August 29th). Certain markets will recover much faster than others due largely to differences in state and local government lockdown policies and Covid-19 case rates. Identifying which of these retail and hotel REITs are poised for a disproportionately strong recovery and which may not survive the downturn presents an incredible opportunity to attain outsized returns. By carefully analyzing REIT data and industry trends, active investors have the opportunity to outperform ETFs.
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