Top REITs for May 2023

Top-performing real estate investment trusts (REITs) in May include Peakstone Realty Trust, Apartment Investment & Management Co., and Service Properties Trust, which have risen 45% or more in the past year, even as volatility in U.S. real estate markets persists.  

REITs, represented by the Real Estate Select Sector SPDR Fund (XLRE), have declined by 13% over the past 12 months, compared with a 3% rise in the Russell 1000 Index.

Here are the top REITs in three categories: best value, fastest growth, and most momentum. All data is as of May 11.

Best Value REITs

These are the REITs with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profit can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you're paying less for each dollar of profit generated.

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• H&R Real Estate Investment Trust: This is a North American REIT with a residential, commercial, and office property portfolio. On April 20, the company closed on selling 160 Elgin Street, an Ottawa office property, for $277 million to a real estate firm called Groupe Mach.
• Nexus Industrial REIT: Nexus acquires and manages industrial and retail properties in North America.
• Apollo Commercial Real Estate Finance Inc.: Apollo is a private equity firm that invests in buyouts, distressed assets, and acquisitions. In March, Apollo Global announced that a fund managed by affiliates had agreed to acquire Univar Solutions, a specialty chemical distributor, in an all-cash transaction totaling $8.1 billion. On April 17, the company announced a $500 million investment in education technology company Cengage Group.

Fastest-Growing REITs

These are the top REITs as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth.

Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax laws or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 1,000% were excluded as outliers.

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• Two Harbors Investment Corp.: Two Harbors finances and manages mortgage-backed securities (MBS). Some of the company's assets include adjustable-rate mortgages (ARM) and Agency RMBs. In early February, Two Harbors announced an underwritten public offering of 10 million shares of common stock. The company said it expects to purchase various financial assets such as MBS and mortgage serving rights with the net proceeds from the public offering. On May 1, the company reported a net loss of $189 million for the first quarter, attributed to significant losses on servicing assets compared with the previous year and interest-rate volatility.
• Apollo Commercial Real Estate Finance: See company description above.
• Farmland Partners Inc.: This is a real estate company that acquires farmland in North America and provides farmers with secured loans. On May 15, the company announced the sale of more than 2,400 acres of land in Nebraska and South Carolina to the tenants renting the properties. Farmland Partners received $16.2 million for this transaction.

REITs With the Most Momentum

These are the REITs that had the highest total stock-price return over the past 12 months.

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• Peakstone Realty Trust: This is a REIT that owns primarily single-tenant industrial properties. The company's IPO date was April 13, which may account for the abnormally high return compared with similar REITs. Peakstone's first-quarter net income was 30 times greater than the previous year's period, partially due to multiple property sales totaling $169.6 million.
• Apartment Investment & Management Co.: This is a property development company that targets the multifamily market.
• Service Properties Trust: Service Properties is a REIT that invests in hotels and retail net lease agreements, with more than 200 hotels located within North America.

Key Metrics for Analyzing REITs

Investors should have an understanding of specific metrics when analyzing REITs due to REITs' specialized structure. Two key metrics used to analyze these securities include funds from operations (FFO) and adjusted funds from operations (AFFO).

FFO: This metric measures a company's cash flow generated through its business operations by adding and subtracting certain items from net income. Investors calculate FFO by adding depreciation and amortization charges to net income while deducting gains from property sales. FFO gives investors a more accurate reflection of operational performance, as real estate investments typically appreciate, rather than depreciate like many assets, in value over time.

AFFO: This measures a real estate company's recurring/normalized FFO after deducting capital maintenance expenditures. Many analysts consider AFFO a superior measure to FFO as it considers the ongoing costs of managing a real estate property over its life. Investors typically use AFFO to determine a company's ability to pay dividends to stockholders in the future.

Practical Example Calculating FFO and AFFO

Let's assume XYZ Ltd. reported net income of $1 million. It also incurred $50,000 and $100,000 in depreciation and amortization costs during the same reporting period. In addition, the company had a $200,000 profit from the sale of a property in its portfolio.

XYZ also reported rents of $75,000 and recurring capital expenditures (CapEx) of $100,000, which it incurred when making maintenance repairs to properties it owns.

Step 1: Calculate the FFO value.

FFO = $1,000,000 + $50,000 + $100,000 – ($200,000)

FFO = $1,150,000 – $200,000

FFO = $950,000

Step 2: Deduct recurring capital expenditures and rents from the FFO value.

AFFO = FFO – Capital Expenditures – Rent Adjustments

AFFO = $950,000 – $100,000 – $75,000

AFFO = $775,000

Advantages of Investing in REITs

Two primary advantages REITs provide investors relate to liquidity and diversification. Real estate investments have a time-tested favorable risk/return profile with less volatility compared with other assets. However, closing real estate deals typically takes weeks or months, making the asset class extremely illiquid. REITs solve this problem by having their securities traded on major stock exchanges, allowing investors to buy and sell easily.

Real estate investment requires a significant financial commitment, often limiting buyers to a specific market or type of property. Investing in REITs solves this issue by allowing investors to diversify, with many trusts holding a portfolio of different property types, such as condos, retail space, healthcare facilities, or even telecommunication infrastructure.