Specialty REITs: Unique and Innovative Investment Strategies

Specialty REITs own and manage a unique mix of property types and collect rent from tenants. Specialty REITs own properties that are outside the scope of the current REIT sectors in the FTSE Nareit indices. Examples of properties owned by specialty REITs are diverse and range from movie theaters and experiential properties, to land leases, farmland, and outdoor advertising sites. It is a sector where investors can find distinct and innovative strategies.

Current constituents of the specialty REIT sector include:

• EPR Properties: a diversified experiential REIT whose real estate venues drive value by facilitating out of home leisure, recreation, and social experiences.
• Gladstone Land Corporation: a REIT focused on the ownership of high-quality farms and farm-related properties that are leased on a triple-net basis to tenants.
• Iron Mountain Incorporated: a storage and information management services REIT that has increasingly embraced digital transformation and data centers.
• Lamar Advertising Company: an outdoor advertising REIT that offers a variety of billboard, interstate logo, transit, and airport advertising formats.
• OUTFRONT Media Inc.: an outdoor advertising REIT that leverages technology, location, and creativity to drive impact and engagement between brands and audiences.
• Safehold Inc.: a ground lease REIT that provides a low cost of capital and unlocks embedded value for owners, operators, and developers.

While the specialty sector can be viewed as a catch-all grouping, it often acts as an incubator for new property sectors. Gaming REITs that specialize in owning experiential real estate like casino and entertainment properties and leasing them through long-term, triple net structures were part of the specialty sector prior to the launch of the gaming sector in June 2023.

The FTSE Nareit All Equity REITs Index showed that the specialty sector was the best-performing sector of the 13 public equity REIT property sectors on a year-to-date total return basis through October 2024; its total return was 52.6%. In comparison, the broad FTSE Nareit All Equity REITs Index posted a total return of 10.1% over the same time period.

Iron Mountain, a storage and information management services REIT that has increasingly embraced digital transformation and data centers, was the primary driver of the specialty sector’s recent strong performance. As of the end of October 2024, it accounted for nearly 64% of the sector’s equity market capitalization and posted a year-to-date total return of 80.7%.

Data from the Nareit Total REIT Industry Tracker Series (T-Tracker^®) indicate that specialty REIT operational performance has remained strong. As of the second quarter of 2024, the most recent data available, the sector’s year-over-year net operating income growth amply kept pace with inflation; it was 4.1%.

Specialty REITs have also maintained solid balance sheets. As of the second quarter of 2024, Nareit T-Tracker data show that fixed rate and unsecured debt accounted for 85.2% and 84.5% of total debt, respectively. Disciplined balance sheets and access to unsecured debt provide competitive advantages to these REITs over typical property investors.

• 3.8%: The specialty sector constituents in the FTSE Nareit All REITs Index account for 3.8% of the index market capitalization, as of the end of October 2024.
• 100%: Nareit’s Actively Managed REIT Fund Tracker showed that active REIT-dedicated managers held the specialty sector at a 100% share of its index weight in the second quarter of 2024.
• $2.0 billion: According to the Nareit T-Tracker, the value of the specialty sector’s property development pipeline exceeded $2.0 billion as of the second quarter of 2024.

Below is a list of Nareit member companies from the specialty sector.