While the majority of real estate investment trusts continue to trade at a significant discount to their consensus net asset value estimates, those in the hotel, retail and residential sectors with stronger leverage ratios are trading at smaller discounts than their peers, according to an S&P Global Market Intelligence analysis.
With many analysts predicting a recession in the not-so-distant future, REITs with stronger leverage metrics will have an easier time riding out a potential downturn in the market and could have additional offensive capabilities to take advantage of distressed properties coming to the market at a discount.
Hotel sector
Host Hotels & Resorts Inc., the largest hotel REIT by market capitalization, had the lowest net debt to last-12-months recurring EBITDA multiple in the hotel sector and had the largest fixed-charge coverage ratio, calculated as recurring EBITDA dividend by interest expense and preferred dividend payments. As of June 16, Host Hotels traded at a 28.8% discount to net asset value (NAV), 10.9 percentage points lower than the sector median of 39.7%.
Apple Hospitality REIT Inc. traded at the lowest discount to NAV, at 21.9%. The REIT's net debt to last-12-months recurring EBITDA was 3.5x while its fixed-charge coverage ratio was the second-highest of the group at 7.0x.
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Ryman Hospitality Properties Inc. and Chatham Lodging Trust followed next, trading at discounts of 22.7% and 26.6% to their consensus NAV estimates, respectively. Net debt to last-12-months recurring EBITDA for both REITs fared better than the sector median.
At the other end of the hotel REIT peer group was Ashford Hospitality Trust Inc. and Sotherly Hotels Inc., trading at discounts of 73.5% and 56.3%, respectively. Both REITs are the smallest by market capitalization but are also more levered compared to the sector median.
Retail sector
When looking at the retail sector overall, REITs with stronger leverage ratios were trading closer to their consensus NAV estimates than those with weaker leverage ratios.
Single tenant-focused retail REITs traded much closer to their consensus NAV estimates compared to the other retail property sectors, with a handful of single-tenant REITs trading at a premium to NAV.
Essential Properties Realty Trust Inc. was at the top of the list, trading at the highest premium to NAV at 14.3%. At the end of the first quarter, Essential Properties Realty Trust's net debt to last-12-months recurring EBITDA was 5.0x while its fixed-charge coverage ratio was calculated at 6.2x, both stronger than the single-tenant retail REIT median.
On the other end, The Necessity Retail REIT Inc. and Modiv Inc. traded at the steepest discounts to NAV within the single-tenant retail sector, at 57.0% and 35.6%, respectively. Both REITs were also more levered than the single-tenant REIT median.
Phillips Edison & Co. Inc. was the only shopping center REIT trading at a premium to NAV, at 4.4%. Net debt to last-12-months recurring EBITDA for the REIT was 5.2x for the recent quarter, compared to 6.5x for the shopping center REIT median.
Regency Centers Corp. placed second among shopping center REITs, trading at a discount to NAV of 13.2%. Regency Centers' net debt to last-12-months recurring EBITDA multiple was 4.6x, the second-lowest multiple of the peer group after Urstadt Biddle Properties Inc.'s 3.8x.
Residential sector
While not quite as pronounced as the hotel and retail sectors, residential REITs trading at the steepest discounts to NAV also tended to be those with the weakest leverage ratios, while those with stronger leverage ratios traded closer to their consensus NAV estimates.
BRT Apartments Corp. closed June 16 at the steepest discount to NAV, at 49.1%. Net debt to last-12-months recurring EBITDA for the REIT was the second-weakest of the residential REIT peer group at 13.3x, and its fixed-charge coverage ratio was also among the bottom 1.8x.
NexPoint Residential Trust Inc.'s leverage ratios were only slightly better with net debt to last-12-months recurring EBITDA of 12.3x and a fixed-charge coverage ratio of 2.4x. As of June 16, the REIT traded at a 32.1% discount to NAV.
Manufactured home-focused Equity LifeStyle Properties Inc. was the only residential REIT to trade at a premium to NAV as of June 16, at a slight 0.8%.
Other property sectors
While stronger leverage ratios contributed to better trading valuations for REITs within the hotel, retail and residential sectors, valuations within the other property sectors seemed to be less correlated to their leverage levels.
