REITs vs. the S&P
Broader markets, as measured by the S&P, have hit an all-time high but I think REITs missed the memo. Over recent months and quarters, REIT underperformance has been substantial.
Source: SNL Financial
Was the cause of this underperformance just random fluctuation or more fundamental in nature?
FFO growth has come in a bit slower than it has historically, but it remains consistently positive. In 3Q16, FFO grew by 6.34% followed by 14.35% in 4Q16. In 2017, it slowed a bit to 2.55% and 3.48% for 1Q and 2Q respectively.
Using the most recent number, 3.48% FFO growth combined with a 3.8% yield, it would suggest that REITs are on pace to return about 7% annually going forward, assuming no change to trading multiples. Clearly, such a projection is subject to sizable error bars, but from a broad brush perspective, these numbers indicate REITs are approximately in the midrange of viability relative to history.
The S&P, however, has gotten quite expensive in my opinion with a TTM PE of 24.9X (REITs are 19.8X ttm FFO). This is more expensive than virtually any period of history with exception to the .com bubble and the financial crisis when low to negative earnings made the ratio go haywire. I’m a REIT specialist, so perhaps there is something I am missing that justifies this multiple, but from the 1,000 foot view, it looks expensive to me.
Overall, I believe REITs are presently a higher return place to park one’s money than the S&P. Quite simply, REITs are in the midrange of return outlook relative to their history, while the S&P is less desirable as an investment than its midrange.
2CHYP is a REIT dedicated investment vehicle and will likely remain so even when REITs are in a less favorable position. Our core belief is that over long swaths of time REITs are a good place to be and can be even better when the REITs are hand-picked for quality and value. The current advantages of REITs over the S&P simply make my job a bit easier.
Commentary may contain forward looking statements which are by definition uncertain. We retain no obligation to update or correct forward looking statements should the available information change. Actual results may differ materially from our forecasts or estimations.