The Best-Performing REITs Of 2023
If there's one thing about Wall Street that's predictable, it's that so often it can be entirely unpredictable. When investors expect a pullback, the market races up another 5%. Conversely, declines tend to occur when investors least expect them.
Although 2023 began well for real estate investment trusts (REITs), by February it was obvious that the Federal Reserve would have to raise interest rates much more to get back to its desired 2% inflation target. The next eight months then proved difficult for REITs, as multiple interest rate hikes by the Federal Reserve sent most of the group into a substantial decline.
REITs bottomed out at the end of October and bounced back nicely over the last two months as the Fed paused rates for three consecutive months and projected three possible rate cuts in 2024. Office and mortgage REITs (mREITs) were particularly strong, but all subsectors participated in the rally.
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For all of 2023, the S&P 500 outperformed the real estate sector by 24.58% to 12.41%. Over the last three months of the year, real estate outperformed the S&P 500, 18.8% to 11.25%.
At the beginning of 2023, if investors were asked which REITs would lead the group in total return this year, many might have pointed to long-term stalwarts such as Realty Income Corp. (NYSE:O), American Tower Corp. (NYSE:AMT), Equinix Inc. (NYSE:EQIX) or perhaps Prologis Inc. (NYSE:PLD) as the favorites.
But investors might be surprised to hear that only some of those REITs were anywhere near the top 20 leaders. Most of the REITs in the top 10 were micro or small-cap stocks.
Take a closer look at the four best-performing REITs in 2023, along with 10 other REITs that performed well with total returns greater than 39% in 2023.
Angel Oak Mortgage REIT Inc. (NYSE:AOMR) is an Atlanta-based mREIT that specializes in offering wholesale nonqualified (non-QM) mortgage loans for borrowers who don't fit traditional lending guidelines. Some of their mortgages include investor cash flow loans, asset-qualifying loans and loans for self-employed people. Angel Oak is a micro-cap stock with a $273.62 million cap rate.
Following a terrible 2022 in which Angel Oak Mortgage had a total return (including dividends) of negative 61.9%, it led all REITs in 2023 with a stunning 129.64% total return.
About 65% of its total return occurred in January when mREITs and other financial services companies bounced higher from extremely oversold levels. But Angel Oak was a steady gainer throughout the year.
Tanger Inc. (NYSE:SKT), formerly called Tanger Factory Outlet Centers Inc., is a Greensboro, North Carolina-based retail REIT that owns 38 indoor shopping centers and outdoor factory outlet malls with 15 million square feet and over 3,000 stores across 20 states and in Canada. Tanger Factory Outlet Centers was founded in 1981 and had its initial public offering (IPO) in May 1993. Tanger is a small-cap stock with a $3.02 billion cap rate.
Tanger has produced some positive news in recent months. On Oct. 13, Tanger announced a 6.1% increase in its quarterly dividend from $0.245 to $0.26 per share, increasing its annualized dividend from $0.98 to $1.04 per share.
As so often happens, a dividend increase shortly before earnings are reported portends a good quarter for the company. On Nov. 6, Tanger reported its third-quarter operating results. Funds from operations (FFO) of $0.50 beat the estimates of $0.47 and was above its FFO of $0.47 in the third quarter of 2022. Revenue of $117.35 million beat the estimates of $110.02 million and revenue of $111.45 million in the third quarter of 2022.
With the solid quarter in hand, Tanger also boosted its 2023 full-year guidance of FFO from $1.85-$1.92 to $1.90-$1.94. That caught investors' attention and led to two solid months of appreciation to end the year.
Tanger has also been aggressive in recent acquisitions. On Nov. 30, Tanger announced it had acquired Bridge Street Town Centre, an 825,000-square-foot open-air lifestyle center in Huntsville, Alabama. Bridge Street has 80 retail stores, restaurants and entertainment sites. Two weeks earlier, Tanger announced the $70 million acquisition of Asheville Outlets in Ashville, North Carolina.
On Dec. 18, JPMorgan analyst Michael Mueller upgraded Tanger from Neutral to Overweight and raised the price target from $27 to $29.
Tanger was the second-best REIT overall in 2023, with a total return of 63.58%, overcoming the popular idea that in-store retail shopping is in decline because of the popularity of Amazon.com Inc. (NASDAQ:AMZN) and other online retailers.
Seven Hills Realty Trust (NYSE:SEVN) is a Newton, Massachusetts-based mortgage REIT since 2008. It originates and invests in first mortgages that are secured by middle market and transitional commercial real estate. It's externally managed by Tremont Realty Capital, a subsidiary of the RMR Group Inc. (NASDAQ:RMR). Seven Hills is a micro-cap stock with a $193.88 million cap rate. Highlights for the year included:
On July 18, Seven Hills Realty announced it closed a $26.5 million bridge loan to finance the acquisition of Woodfield Commerce Center, a 320,000-square-foot industrial warehouse property in Fountain Inn, South Carolina. The two-year initial term loan has a possible one-year extension option.
On Sept. 26, Seven Hills Realty appointed Fernando Diaz as its new chief financial officer and treasurer, effective Oct. 1.
On Oct. 31, Seven Hills Realty Trust reported its third-quarter operating results. Earnings per share (EPS) of $0.36 missed the estimates of $0.37 but was a 33.3% increase over EPS of $0.27 per share in the second quarter of 2022. Revenue of $9.8 million beat the estimates for $8.76 million and was a 25.6% increase over revenue of $7.8 million in the third quarter of 2022.
On Dec. 5, Seven Hills announced it closed on a $29 million bridge loan to refinance a 174-room Tapestry Collection by Hilton hotel in Anaheim, California. The loan has a two-year initial term with three annual extension options.
Seven Hills Realty has increased its year-over-year EPS growth over the last four quarters, and that contributed to a total return of 58.53% in 2023.
Park Hotels & Resorts Inc. (NYSE:PK) is a Tysons, Virginia-based REIT with more than 26,000 rooms in 43 hotels and resorts in prime U.S. markets with high barriers to entry. Properties in Hawaii account for 36% of its portfolio. Park Hotels is a small-cap stock with a market cap of $3.63 billion.
Park was established as an independent company in January 2017 following its spinoff from Hilton. In September 2019, Park acquired Chesapeake Lodging Trust to add premium-brand hotels and resorts in prime markets such as Miami, Boston, Los Angeles and San Francisco.
Although Park Hotels is the leading hotel REIT and fourth-highest overall with a 53.95% gain in 2023, it should be noted that at a recent close of $15.37, it's still well below its pre-COVID and 2021 highs near $23.20.
December was a particularly good month for Park Hotels investors. One event that recently boosted its share price was Park Hotels' announcement that in addition to its regular quarterly dividend, it will pay out two special cash dividends in January because of closing out two properties that were formerly in receivership.
On Dec. 14, JP Morgan analyst Brandt Montour upgraded Park Hotels and Resorts from Underweight to Neutral and raised the price target 45.4% from $11 to $16.
On Dec. 20, Park reaffirmed its 2023 outlook for comparable revenue per available room (RevPAR) and other metrics from its third-quarter earnings.
Park Hotels was the leading hotel REIT and fourth-best overall REIT in 2023 with a 53.95% total return.
In addition to the four REITs named above, 10 other REITs performed superbly in 2023. The chart below details their cap size, subsector and total return this year.
NAME | SYMBOL | CAP SIZE | SUBSECTOR | 2023 TOTAL RETURN % |
Empire State Realty Trust Inc. | ESRT | Micro | Diversified | 48 |
Iron Mountain Inc. | IRM | Medium | Specialized | 46.52 |
Macerich Co. | MAC | Small | Retail | 46.51 |
SL Green Realty Corp. | SLG | Small | Office | 45.59 |
Ryman Hospitality Properties Inc. | RHP | Small | Hotel | 43.57 |
Rithm Capital Corp. | RITM | Small | Mortgage | 42.75 |
Vornado Realty Trust | VNO | Small | Office | 41.54 |
EPR Properties | EPR | Small | Diversified | 41.09 |
Welltower Inc. | WELL | Large | Health Care | 39.64 |
Lument Finance Trust Inc. | LFT | Micro | Mortgage | 39.36 |
The improving relative strength of REITs can be seen by the representation of seven different subsectors among the top 14 REITs of 2023, rather than just one or two subsectors being predominant.
Note: All REITs cited in this article were over $5 per share. Results are as of the closing prices on Dec. 28.
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