REITs have fully recovered with the index approaching its former highs.  At an index level, the period of opportunistic pricing has come to a close.  However, there is substantial pricing disparity within REITs that individual securities are still quite cheap.  Let us take a look at some sector price ranges.  For each sector, the multiples presented are based on the 2019 Capital IQ consensus FFO estimates.

The industrial sector trades at an average multiple of 20.3X with a range of 10X for Plymouth (PLYM) up to 29.9X for Rexford (REXR).  We hold STAG at 15X and gain ancillary industrial exposure through GOOD at 12X.  The industrial sector is not cheap; our stocks are.

Healthcare REITs trade at an average multiple of 14.4X with a range of 6.9X to 20.1X.  GMRE trades at 11.8X but it has superior property types of hospitals and medical office.  The cheap end of the healthcare REITs consists of trouble SNF and senior housing REITs while the other medical office REITs trade at 17X.  GMRE gives exposure to the strong MOB fundamentals without the associated price tag.

Triple net REITs are reaching all time highs with some now trading at multiples over 20X.  Global Net Lease is at just 9.1X 2019 FFO.  Deeper value allows it to support a larger dividend yield.  Management at GNL is admittedly worse than some of the other triple net REITs, but the difference is not as extreme as the pricing difference.

Communications REITs other than Uniti Group all trade over 20X while UNIT trades at 8.4X.  This represents the gap UNIT could close if and when the Windstream overhang clears up.  The sector has strong fundamentals with regulation stifled supply growth and rapidly growing demand.

The REIT index is not overvalued, but its expected return has shrunk back to historical norms given the price recovery.  Individual REITs have far better prospects with higher baseline expected returns from the greater cashflow yields and potential for more rapid capital gains as they close the gap on their peers.

It is nice when a rising tide is lifting all boats as has been the case for most of 2019, but once the market stops giving, it will be the value that can still excel.

A few of the companies in 2CHYP reported earnings this week.  Please check out our earnings updates in the portfolio analytics section of 2CHYP.

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2/14/19 2CHYP Performance since inception

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