The State Of REITs: July 2025 Edition

REITs posted a +2.56% average total return in June, continuing their recovery but lagging broader market indices, resulting in a -5.65% year-to-date performance. Micro cap REITs significantly outperformed in June (+7.19%), narrowing the FFO multiple spread between large and small caps, though large caps still command a substantial 32.3% premium. While Office and Single Family Housing led property type gains in June, sectors like Hotel and Shopping Centers struggled year-to-date, with significant discounts to NAV persisting across smaller-cap REITs. Positively, 71% of Q2 FFO guidance adjustments were upward revisions (excluding a specific outlier), and numerous REITs announced dividend hikes, suggesting improving fundamentals and potential for continued total return performance.

Analysis

The REIT sector continued its recovery in June with a 2.56% average total return, yet it significantly underperformed broader markets like the NASDAQ (+6.6%), resulting in a year-to-date deficit of -5.65%. A notable divergence occurred within the sector, as micro-cap REITs surged by 7.19% in June, outperforming large-caps which were flat at +0.03%. This has slightly narrowed the valuation gap, though large-cap REITs still trade at a substantial 32.3% premium to small-caps based on 2025 FFO multiples (17.6x vs. 13.3x). This premium is also evident in Price/NAV figures, where small and micro-cap REITs exhibit deep discounts of -26.74% and -40.90%, respectively. Performance across property types is highly bifurcated: Office (+7.60%) was a top performer in June but remains one of the worst year-to-date (-15.27%), while Health Care (+8.98%) and Casinos (+7.35%) lead on a year-to-date basis. Fundamentally, a positive signal comes from Q2 guidance updates, where 71% of revisions were upward, although downward revisions were concentrated in the Hotel sector. Despite this, dividend hikes across 45 REITs in the first half of 2025 signal management confidence, though idiosyncratic risks remain high, as illustrated by the distressed situations at Wheeler REIT (WHLR) and Presidio Property Trust (SQFT).

Key Decisions for Investors

• Given the substantial valuation gap where large-caps trade at a 32.3% FFO multiple premium, investors should analyze fundamentally sound small and mid-cap REITs trading at significant discounts to NAV for potential alpha.
• The wide performance dispersion between property types, such as the year-to-date strength in Health Care versus weakness in Hotels, suggests that a targeted, sector-specific strategy is superior to broad index exposure via ETFs like VNQ.
• Focus on REITs demonstrating fundamental strength through positive FFO guidance revisions and dividend growth, but scrutinize headline figures, as seen with Sun Communities' (SUI) misleading guidance adjustment.
• Be cautious of the most beaten-down names, as the outsized June gain in Wheeler REIT (WHLR) was merely a 'dead cat bounce' against a -98.72% year-to-date collapse, highlighting extreme risk in certain micro-caps despite the group's monthly outperformance.