REIT stocks aren't working and they haven't been working for years. The performance of the shares since 2016 have been just plain ugly. Some of this is due to the fact that underlying real estate values have declined in the office and mall spaces. The technological disruptions caused by e-commerce and work from home have certainly exacted a toll on those markets. So if you add leverage into the mix, it makes for a precipitous decline in valuations. On the flip side, the industrial sector became a huge beneficiary of e-commerce with values up 75%. However, apartment values, according to Green Street Advisors, are up by about 10% since 2016 and strip retail values are essentially unchanged, while the share prices in those two sectors are down over the eight year period.
As many of you know I have a long history in real estate and REITs going back to the 1970's when I penned my Ph.D. dissertation on REITs. Although I have long since left sell-side research and my stint at running the Real Estate Securities program and the University of Wisconsin, I still have more than a passing interest in the space. Presented below is the performance of what I perceived to be quality large cap names while I was a practicing analyst. I also include the performance of the newer tech related REITs in the data center and cell tower markets who have done far better than the more traditional REITs. (See Table 1) I would also note how well the storage stocks and the Sunbelt oriented apartment stocks have done compared to those REITs focused on the over-owned coastal markets.
Table 1. The Performance of Selected REITs, 2016 High - April 13, 2023
Sector/REIT 2016 High Apr. 13, 2023 % Change
Office
Boston Properties 144 52 -64%
Highwood Prop. 53 23 -57
Kilroy Realty 77 30 -61
SL Green 128 23 -82
Vornado 90* 15 -83
*-Adjusted to the JBG Smith spin-off.
Apartment
AvalonBay 192 170 -11
Camden Property 91 104 +14
Equity Residential 82 60 -27
Essex Property 240 211 -12
Mid-America 110 147 +34
UDR 39 40 + 3
Strip- Retail
Federal Realty 171 97 -43
Kimco Realty 32 19 -41
Regency Centers 85 60 -29
Mall
Macerich 96 10 -90
Simon Property 229 109 -52
Industrial
Prologis 55 122 +122
Hotel
Host Hotels 20 16 -20
Storage
Extra Space 95 159 +67
Public Storage 278 305 +10
Healthcare
Ventas 77 44 -43
Welltower 80 75 - 6
Tech Related
American Tower 113 211 +87
Digital Realty 113 92 -19
Equinix 391 709 +81
Given this rather poor performance of real estate in the public markets, it is puzzling to see that major institutions have just thrown a record $30 billion at the new Blackstone Real Estate Fund. For whatever reason, investors seem to prefer their real estate in a private wrapper rather than a public one. Perhaps some of that money will find its way into taking private several of the REITs mentioned here that are selling well below analyst estimates of net asset value. I recently spoke to someone very knowledgeable in this regard, and he noted that despite the price declines, the stocks are not cheap enough to entice a deal. But should interest rates drop as the markets now anticipate, that situation could very well change.
To me there is one lesson to be learned here. Investors have to be more cognizant what REIT managements are doing with respect to capital allocation, leverage and executive compensation. It seems that there has been quite a bit of leakage between the underlying performance of the real estate and the returns earned by REIT shareholders.
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