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Although real estate investment trusts overall performed well in the first half of 2021, investors will have to be more discerning for success moving forward.
REITs are popular among income investors because they are required to pay out at least 90% of their taxable income in dividends to shareholders. What’s more, REIT dividends generally held up better than initially expected during the pandemic, though there were some cuts in sectors like lodging.
“The property market is not homogenous, so you have had continued divergence in results,” says Michael Knott, head of U.S. REIT research at Green Street, a research firm specializing in real estate.
Self-storage REITs have been stellar performers this year, returning about 41% on average for the year through July 7, according to the Nareit, a trade group. The storage sector, which outperformed last year as well, is benefiting from a strong housing market.
For example,
National Storage Affiliates Trust
(ticker: NSA), which yields about 3%, has returned nearly 50% this year, dividends included.
Residential REITs have also been impressive performers this year, returning about 33% on average. That’s nearly double the S&P 500’s result of around 17%.
Regional malls, which had struggled in recent years and suffered during the pandemic, have returned about 50% for the year through July 7.
One of that sector’s biggest operators,
Simon Property Group
(SPG), recently declared a quarterly dividend of $1.40 a share, up 8% from $1.30. It has returned about 50% through July 7.
Even many of the underperforming sectors have done respectably.
Data centers, one of the top gainers last year, have lagged in 2021 with a 14% return—not market-beating but hardly a disaster. “Data centers were a big beneficiary during Covid, and there’s skepticism around the sustainability of that, despite all the demand for data,” says Gina Szymanksi, a portfolio manager at AEW Capital Management, citing pricing power for rental agreements as one concern.
She says it’s important for investors to examine the fundamentals in various sectors and to assess the pace of the recovery in each one. “Not all Covid winners will necessarily taper off,” she says. And “not all Covid losers will rebound at the pace people are expecting.”
Szymanski sees more upside in sectors such as apartments, single-family rentals and various industrial REITs.
She is more cautious on office REITs, which have returned about 15% this year, partly because “there’s still controversy about long-term office demand given work-from-home trends.”
First-half returns don’t always tell the full story. Case in point: Lodging/resort REITs have returned about 12% this year, helped by a strong first quarter. That’s been followed by weaker returns more recently. One concern is that business travel coming out of the pandemic continues to be weak compared to historical levels. “Investors are trying to assess the net impact of how severe business travel’s impact will be, combined with this remarkable strength in leisure travel,” Green Street’s Knott says.
One subsector where Knott sees opportunity is gambling REITs such as
MGM Growth Properties
(MGP) and
Gaming & Leisure Properties
(GLPI). Both of these REITs own, but don’t operate, various casino properties. “The gaming REITs don’t reflect the attractiveness of the underlying real-estate value of what they own,” Knott says.
Szymanksi says REIT valuations overall “are fair, relative to history, but the upside is coming from [growth in] cash flows.”
Just don’t expect a rising tide to lift all REITs.
Write to Lawrence C. Strauss at [email protected]