Real estate investment trusts are an asset class in which investors can own shares in an entity that owns and operates income-generating real estate. US REITs in particular are popular with income-oriented investors as these REITs distribute 90% of their taxable income as dividends. In the early days, most REITs were generalists that owned a wide range of real estate assets including office space, hotels, retail and residential.
However, REITs have grown more specialised over time; there are REITs for datacenters, timber, self-storage, healthcare and factory outlets. REITs that make money by owning and renting out real estate are referred to as equity REITs. Mortgage REITs, on the other hand, lend money to real estate owners, either directly or through mortgages. Due to certain changes in society accelerated by the COVID-19 pandemic, including online shopping and remote work, REITs have experienced higher volatility in valuation and dividends in the last three years. But many US and Canadian REITs have undergone a modest return to form in the last few months.
The value of US REIT capital offerings more than tripled month over month in September after a slow August. While a positive development, this was about half the value of US REIT capital offerings a year earlier. Communications-related REITs experienced most of the growth in September. This reflected an ongoing trend of specialty REITs, including advertising, casino, communications, datacenter, energy infrastructure, farmland and timber real estate, receiving the lion’s share of capital raised in 2023.
Canadian REITs enjoyed a strong third quarter. Capital offerings raised a healthy C$987.7 million, higher than the C$721.3 million raised in the second quarter and more than six times the offerings raised in the same quarter of 2022. Retail REITs were far and away the best performers in Canada.
Given the importance of dividend payments for income-focused REIT investors, 2023 has shown improvement. As of the 30th of September, 61 US REITs had announced dividend increases, accounting for about 39% of US REITs, and seven Canadian REITs had announced dividend hikes. Industrial, residential and self-storage REITs led the way on dividend increases, while office REITs have been notable laggards.
Short sellers have noted the weaker performance of office REITs. As of the end of September, office REITs led all other sectors in short positions, followed by hotels. Shopping center REITs experienced the biggest month-over-month increase in short positions, but there was very little interest in short selling energy infrastructure REITs.
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One explanation for the popularity of short positions in shopping center REITs is the high-profile bankruptcy and closure of some prominent retailers. On the 15th of October, Rite Aid filed for Chapter 11 bankruptcy and announced a plan to close underperforming stores to reduce the company’s rent expense and strengthen its overall financial performance. According to S&P Global Market Intelligence data, 80 Rite Aid locations are in REIT-owned properties. When Rite Aid published its initial store closure list of 154 stores, 12 REIT-owned properties were affected.