REIT Performance
The REIT sector had an impressive performance in the last two months of 2023. In December, the average REIT total return significantly surpassed that of the broader market, with double the return of major indices such as NASDAQ, Dow Jones Industrial Average, and S&P 500. The market cap weighted Vanguard Real Estate ETF (VNQ) also outperformed the average REIT in the long run. This monthly publication aims to provide REIT data on various metrics to help readers identify the best investment opportunities and achieve their investment goals.
In December, small cap and mid cap REITs had double-digit total returns, outperforming micro caps and large caps. Throughout 2023, small cap REITs narrowly outpaced mid caps and large caps. However, micro caps had a dismal year with significant losses. Overall, small cap REITs outperformed large caps by 138 basis points in 2023.
17 out of 18 Property Types Yielded Positive Total Returns in December
In December, an impressive 94.4% of REIT property types achieved a positive total return. Malls stood out as the best-performing property type, significantly outperforming all others. However, infrastructure was the only property type that experienced negative returns, mainly due to the poor performance of CorEnergy Infrastructure Trust (OTC:CORR). Despite this, the majority of property types demonstrated strong performance.
Infrastructure and land were the only property types that had negative total returns in 2023. On the other hand, health care and data centers were the best-performing property types throughout the year. The number of REIT property types in the black increased from 7 to 16 during December, indicating positive momentum in the market.
The REIT sector as a whole experienced multiple expansion in December, with the average P/FFO (2024Y) increasing from 12.5x to 13.7x. Different property types showed varying average multiples, with land, data centers, timber, single-family housing, industrial, and manufactured housing trading at the highest multiples. On the other hand, malls, hotels, and office REITs had average single-digit FFO multiples.
Performance of Individual Securities
Several individual securities had notable developments in the REIT sector. RPT Realty (RPT) was acquired by Kimco (KIM) in an all-stock transaction. Pennsylvania REIT (OTC:PRET) gained traction after a bankruptcy announcement that ensured shareholders would not be completely wiped out. Diversified Healthcare Trust (DHC) emerged as the best-performing REIT in December and throughout 2023. However, CorEnergy Infrastructure Trust (OTC:CORR) suffered a significant decline in December after being delisted from the NYSE.
Dividend Yield
Dividend yield is an essential component of a REIT's total return, making it a primary reason for many investors to consider investing in the sector. Currently, many REITs are trading at share prices below their NAV, resulting in attractive dividend yields. Although high yields can sometimes indicate higher risks, there are opportunities to capitalize on sufficiently attractive dividend yields that can justify the underlying investment risks.
Valuation
Valuation is a crucial aspect to consider when investing in REITs. The below table ranks REITs within each property type based on their premium/discount to NAV. The data shows a positive correlation between market cap and FFO multiple, indicating the influence of market cap on valuation.
Takeaway
Investors should closely monitor the trends and fundamentals in the REIT market. It is crucial to analyze individual markets and REIT portfolios to identify potential investment opportunities. Despite challenges in the office space and rising bankruptcy filings, some REITs have managed to outperform the sector by strategically positioning themselves in specific markets.
Rapidly changing market dynamics and individual market performances necessitate thorough research and due diligence. Understanding market fundamentals and comparing individual REITs to the overall trend can lead to significant investment advantages. It is essential to stay informed and make informed investment decisions.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.