Investment News has an article about the excellent returns that REITs have achieved over the past two years (204.7% 3/9/09 - 3/31/11 vs. 112.8% for the Dow Jones US total Stock Market Index).The article goes on to quote several industry professionals suggesting that REITs have room for further expansion.
The primary valuation metric, Price/FFO, would tend to agree. According to REITWatch, office REITs are trading at trading 13.6 times FFO. Retail is trading at 14.6 to 16.2 times depending on the sector. Health Care is at a 15.4 multiple. (An FFO multiple of 12 is the equivalent of an 8.125% cap rate. A multiple of 20 equals a 5% cap rate.) Apartments and industrial properties, on the other hand, appear fully valued at 20.0 and 20.3 multiples, respectively.
Office, retail, and health care are expected to grow FFO at respectable single digit rates over the next year, providing an 11% return assuming no multiple expansion (3.5% yield + 8.1% FFO growth). retail and health care show similar numbers. However, the case for residential and industrial is somewhat weaker given their elevated FFO multiples. It is hard to argue that the multiples will continue as high when cap rates in the private markets are only 100 basis points higher in private transactions. (See e.g., REIS, Inc. data on apartment transactions via the Journal Record.)
Bottom line: REITs have a built in performance advantage in that they are required to distribute their income. These dividends put a floor on performance, and also reduce volatility of returns. They can be valuable additions to a portfolio for this reason.
No comments:
Post a Comment