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The State of REITs: February 2022 Edition

CEO Khai Intela
Image: anyaberkut/iStock via Getty Images REIT Performance After a strong year in 2021, the REIT sector faced a challenging start in 2022, recording a -5.66% total return in January. While this performance was lower than...

real estate concept, choose house to buy Image: anyaberkut/iStock via Getty Images

REIT Performance

After a strong year in 2021, the REIT sector faced a challenging start in 2022, recording a -5.66% total return in January. While this performance was lower than that of the S&P 500 (-5.26%) and the Dow Jones Industrial Average (-3.32%), it fared better than the NASDAQ (-8.98%). The Vanguard Real Estate ETF (VNQ) also underperformed in January (-8.42% vs. -5.66%). Despite this decline, there are still opportunities for investors to achieve their investment goals by analyzing REIT data and identifying the best property types and individual securities.

REIT Performance in January 2022 Image: S&P Global Market Intelligence

Micro cap (-1.65%) and small cap (-5.47%) REITs outperformed their larger counterparts in January. However, mid caps (-5.87%) and large caps (-7.20%) suffered heavy losses at the beginning of the year. This shift marked a reversal from 2021, where large caps dominated and micro caps lagged behind. Small cap REITs are currently outperforming large caps by 173 basis points on a year-to-date total return basis.

0 out of 19 Property Types Yielded Positive Total Returns in January

All REIT property types recorded a negative total return in January, with a narrow 11.53% spread between the best and worst performing types. Land (-12.25%) and Manufactured Housing (-11.45%) REITs experienced the worst average total return. The selloff was driven by investor fears of multiple Fed rate hikes in 2022. The five property types with the highest Forward Funds From Operations (FFO) multiples also performed poorly in January.

On the other hand, Health Care (-0.71%) and Hotel (-0.77%) REITs showed resilience in January, largely avoiding the selloff due to their already modest valuations. These property types entered 2022 with multiples at least 3.4 turns lower than the average REIT.

REIT Performance in January 2022 Table Image: S&P Global Market Intelligence

REIT FFO Multiple by Property Type

The average Price/FFO multiple for the REIT sector declined by 1.4 turns in January, from 18.8x to 17.4x. While the FFO multiples increased for certain property types, the sector as a whole experienced a decline. Land (35.6x) and Industrial (28.5x) REITs continue to trade at higher average multiples compared to other property types. Mall (8.1x) REITs are currently the only property type trading at a single-digit multiple.

REIT FFO Multiple by Property Type Image: S&P Global Market Intelligence

Performance of Individual Securities

HMG/Courtland Properties was delisted on January 25th due to a liquidation process announced in December and approved by shareholders in January. American Finance Trust rebranded as Necessity Retail REIT (RTL) on February 14th.

InnSuites Hospitality Trust (IHT) showed significant share price volatility, bouncing back from a -27.33% total return in December to a +36.23% return in January. While there was no material news on InnSuites in January, the micro cap REIT experienced wild price swings that went against the overall sector trend.

Innovative Industrial Properties (IIPR) saw its valuation decline as investors moved away from high multiple REITs in light of expected aggressive Fed rate hikes. Despite the January selloff, IIPR still boasts the highest Net Asset Value (NAV) premium (+68.27%) among all REITs.

Only 12.57% of REITs had a positive return in January, and the average REIT experienced a disappointing -5.66% performance in the month.

Simon Bowler REIT Data January 2022 1 Simon Bowler REIT Data January 2022 2 Simon Bowler REIT Data January 2022 3 Source Image: S&P Global Market Intelligence

Dividend Yield

Dividend yield plays a crucial role in a REIT's total return. Many investors are drawn to the high dividend yields offered by REITs. Currently, with many REITs trading below their Net Asset Value (NAV), dividend yields are attractive. While a high yield can sometimes indicate higher risk, careful analysis can help identify opportunities with attractive yields that justify the associated risks.

Below is a table ranking equity REITs from the highest to the lowest dividend yield as of January 31, 2022.

Simon Bowler REIT Data 01 31 2022 Simon Bowler REIT Dividend Data January 2022 2 Source Simon Bowler REIT Dividend Data 4 Source Image: S&P Global Market Intelligence

Additionally, here is a list of equity REITs that pay monthly dividends ranked from highest yield to lowest yield.

REIT Monthly Dividend Data January 2022 Image: S&P Global Market Intelligence

Valuation

REIT Premium/Discount to NAV by Property Type

A downloadable data table is provided below, ranking REITs within each property type based on the largest discount to the largest premium to Net Asset Value (NAV). The table includes analyst NAV estimates for each REIT, which may change over time. Updated consensus NAV estimates will be included in future editions of The State of REITs.

Simon Bowler REIT NAV Data January 2022 Simon Bowler REIT NAV Data January 2022 3 Simon Bowler REIT NAV Data January 4 Simon Bowler REIT NAV Data 4 Image: S&P Global Market Intelligence

REIT FFO Multiple by Market Cap

There is a positive correlation between market capitalization and Forward Funds From Operations (FFO) multiple. Large cap REITs trade at a significant premium compared to small cap REITs. On average, investors pay about 41% more for each dollar of 2022 FFO/share to buy large cap REITs. The table below highlights this correlation.

REIT FFO Multiple by Market Cap Image: S&P Global Market Intelligence

The table below shows the average premium/discount of REITs for each market cap bucket. There is a strong, positive correlation between market cap and Price/NAV. Large cap REITs (+4.12%) trade at a single-digit premium to consensus NAV, while mid cap REITs (-7.04%) trade at a single-digit discount. Small cap REITs (-13.76%) trade at a double-digit discount, and micro caps on average trade at less than two-thirds of their respective NAVs (-35.43%).

Source Image: S&P Global Market Intelligence

Short Interest

Short interest in the REIT sector increased in January by 20 basis points. Mall REITs remain the most heavily shorted property type, although short interest in this category declined slightly. Overall, the average short interest for all US REITs rose from 3% to 3.2%. Land and Advertising REITs had the lowest short interest at just 1.5%.

REIT Short Interest Change Image: S&P Global Market Intelligence

During the first two weeks of the year, NETSTREIT (NTST) saw a 21% increase in short interest, making it the second most heavily shorted REIT. On the other hand, Retail Opportunity Investments Corp. (ROIC) and Ashford Hospitality Trust (AHT) experienced the largest declines in short interest.

High short interest can indicate potential risks, but it doesn't automatically mean that a REIT is excessively risky. Short squeezes can still benefit long-term investors when both bullish and bearish investors buy shares simultaneously. It is crucial to thoroughly understand the bear case before considering any investment position.

Most Shorted REITs January 2022 Image: S&P Global Market Intelligence

2022 YTD Dividend Increases

Five REITs raised their dividends in January, signaling strong fundamentals and improving earnings. Gladstone Commercial (GOOD), Gladstone Land (LAND), and STAG Industrial (STAG) modestly increased their monthly dividends, while Life Storage (LSI) and UMH Properties (UMH) significantly raised their quarterly dividends. As REIT earnings continue to perform well, more REITs are likely to join the list of dividend increases in 2022.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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