A Look Back at REIT Performance in 2019

By: , Contributor

Published on: Jan 03, 2020

While REITs didn't quite top the S&P 500 index in 2019, they still delivered excellent total returns.

Commercial real estate has historically produced higher total returns than many other investment options like mutual funds and corporate bonds. The same holds for real estate investment trusts (REITs). The National Association of Real Estate Investment Trusts (NAREIT) tracks performance data for REITs and has a complete history of annual returns going back to 1972. Through the end of 2018, the FTSE Nareit U.S. Real Estate Index has produced an average total annual return of 11.4%. For comparison's sake, the S&P 500 Index generated an average annual total return of 7.3% during that time frame.

REITs delivered well above average performance in 2019, as the sector generated a 28.7% total return. While that did fall a bit short of the S&P 500 Index's 32% total return, it was an excellent year for the REIT sector. Here's a breakdown of how each segment of the equity REIT market performed in 2019:

REIT Type Total return in 2019
Industrial 48.7%
Data Centers 44.2%
Timber 42.0%
Infrastructure 42.0%
Office 31.4%
Residential 30.9%
Specialty 27.4%
Diversified 24.1%
Health Care 21.2%
Lodging/Resorts 15.7%
Self Storage 13.7%
Retail 10.7%

Data source: NAREIT

Now, let's look at what drove the biggest winner as well as what weighed on the weakest link in the REIT sector.

The top-performing REIT sector of 2019

Industrial REITs, which own and operate industrial facilities like warehouses, distribution centers, and manufacturing facilities, delivered the best returns for REIT investors in 2019. Overall, the subsector generated a nearly 49% total return. One of the drivers was the continued growth of e-commerce, which is stimulating demand for new warehouse space and distribution centers.

Leading the way, however, was Innovative Industrial Properties (NASDAQ: IIPR), which produced an impressive 72.5% total return. Instead of focusing on industrial properties supporting the e-commerce sector, this industrial REIT specializes in owning and acquiring medical-use cannabis facilities that it then leases back to licensed growers under long-term, triple-net leases.

Last year was a busy one for the company as it bought 30 properties across nine states through early November, bringing its portfolio to 41 facilities. Those new additions helped boost its rental revenue by an eye-popping 201% year-over-year rate during the third quarter while its Adjusted Funds from Operations (AFFO) leaped up to 270%. That enabled the company to grow its dividend by 123% during the year, which helped drive its strong total return.

The worst-performing REIT sector of 2019

Retail REITs, on the other hand, delivered an underwhelming performance in 2019, as the average one only produced a 10.7% total return. That doesn't tell the whole story, however, as shopping centers and free-standing retail locations performed well, delivering total returns of around 25%. Regional malls, on the other hand, produced a negative total return of 9.1%, pulling down the entire sector. That's largely because consumers are doing more of their shopping online. That's hurting retail sales, which caused several mall-based retailers to declare bankruptcy in 2019 while many more closed stores, impacting occupancy in regional malls.

While shares of several regional mall owners tumbled in 2019, CBL Properties (NYSE: CBL) was the worst performer, producing a total negative return of 42.7% on the year. The wave of retail bankruptcies had a big impact on CBL Properties last year. Occupancy declined below 90% across its portfolio, negatively impacting its FFO. With the REIT expecting further declines in rental income in 2020, it chose to suspend dividend payments to preserve cash. That will give it the funds to continue redeveloping its properties by backfilling vacant space with non-retail tenants like dining, entertainment, and fitness while also repurposing parking lots to make way for hotels, restaurants, and self-storage facilities. It hopes that these investments to diversify will help grow shareholder value in the future.

2020 could be another good year for REITs focused on the right real estate

Aside from regional mall owners, 2019 was an excellent year for REIT investors. Most generated strong total returns by providing investors with healthy share price appreciation and dividend income. While it will be tough for the sector as a whole to match this performance in 2020, technology-focused REIT subsectors like industrial, data centers, and infrastructure could continue producing strong total returns as these companies expand their ownership of this in-demand real estate.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Innovative Industrial Properties. The Motley Fool has a disclosure policy.