Public REIT valuations vs. private market

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sillysaver
Posts: 102
Joined: Thu Oct 08, 2015 5:24 pm

Public REIT valuations vs. private market

Post by sillysaver » Sun Aug 19, 2018 9:50 am

This was written in July, so it should still be relevant. Green Street does valuation analysis on public REIT's. Sometimes there are significant discounts or premiums over NAV, which could be a signal of market direction or an opportunity to buy/sell and capture the delta.

This got me thinking: is there much difference between the un-leveraged returns of directly owned commercial real estate vs. those of publicly traded REIT's? You would have to look at un-leveraged returns to compare apples-to-apples but it seems like most publicly traded equity REIT's are probably using a relatively conservative leverage levels. The higher ROI / IRR you see in privately owned real estate probably has a lot to do with leverage. Anyways, that's a different discussion.

Here's an excerpt:

Two Different Universes

The commercial real estate market is bifurcated into two universes with buyers working from different sets of data. There are many investors who buy buildings directly or invest in funds that buy buildings. There is also a smaller, but rapidly growing group of investors who buy their real estate via Real Estate Investment Trusts (REITs). The fact that the first group is so large means that many important real estate market participants are often in the dark when it comes to the goings-on in public real estate markets. As a result, pricing discrepancies across private and public markets grow wider and last longer than would be the case if capital flowed more freely between the two. I am going to make the case that all real estate investors should look to the public market for signals on operating fundamentals and valuation.

Unprecedented Discounts for Public REITs

First, reliable market information on public REITs is readily available. Every 90 days, some of the biggest and best real estate owners and operators release data that tell us exactly what’s happening in the marketplace. Equity Residential (EQR), Simon Property Group (SPG), and Prologis (PLD) are just a few of the best-in-class companies that give investors a treasure trove of information for free every quarter. Why not take advantage of that?

Second, the market is sending some remarkable valuation signals. At Green Street, we look at how REITs trade relative to the private market value of their underlying assets. In the apartment sector, the average REIT is trading at a 14% discount to the current market value of its assets as of July 2018. The discount is 12% for neighborhood shopping centers and 16% for the office sector. And in the mall business, REITs are priced at a 17% discount.

These discounts are unprecedented. For nearly 30 years, REITs have traded at a 2% premium, on average, compared to Green Street’s assessment of net asset values (NAVs). The public market is sending unusually pessimistic signals about where it thinks some real estate sectors will be priced six months or a year from now.

Conversely, in the industrial sector, the public market is pricing REITs at a premium to the market value of their assets. What does that say? It says that public market investors think that as good as everyone knows industrial is, the future is even better than that.

https://www.greenstreetadvisors.com/ins ... ate-market

sillysaver
Posts: 102
Joined: Thu Oct 08, 2015 5:24 pm

Re: Public REIT valuations vs. private market

Post by sillysaver » Sun Aug 19, 2018 9:53 am

So, the market thinks that hurt is coming for apartments and malls. In multifamily, we've already seen Class A is very soft. Of course, everyone knows about the threat of Amazon in retail. Which is why industrial warehouse REIT's are trading at a premium.

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nedsaid
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Re: Public REIT valuations vs. private market

Post by nedsaid » Sun Aug 19, 2018 10:39 am

I have posted a lot about REITs, I used to be really enthusiastic about them as their returns were similar to US Stocks but with low correlation. They seemed like the perfect diversifier in a portfolio.

My enthusiasm waned in the aftermath of the 2008-2009 financial crisis with very low interest rates and all the yield chasing which drove REIT prices high. Yields fell from 6-8% all the way down to 3%. On the Morningstar Style Box, the REIT index moved from Mid-Value to almost Mid-Growth. I also saw warnings from Larry Swedroe that REITs no longer represented value. He projected real returns going forward at about 0.20%.

So I sold about 20% of my REITs and didn't buy any more. I took criticism for ignoring valuations and keeping a position in REITs. I took criticism for not staying the course by cutting back 20%. I don't know, I was sort of hedging that Larry and others might just be wrong. Now I see this contrary evidence that REITs might have a 14% discount to Net Asset Value. In other words, the REITs trade at a discount to the value of the underlying properties. So here is a good piece of contrary evidence, which is why I don't have the "all-in" or "all-out" mentality. There is always a bullish case and a bearish case for everything and that is what makes a market.

Of course, the discount can be interpreted as a bearish signal.

So I am staying put here.
A fool and his money are good for business.

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