REITs’ high earnings multiples historically tend to concern portfolio managers, but there is “ample evidence” that their pricing is appropriate, according to research firm Green Street Advisors.
In a note to clients, Green Street Chairman and Director of Research Mike Kirby and Senior Analyst Peter Rothemund analyzed the long-term track record of listed Equity REITs relative to the S&P 500 across a variety of performance metrics. They found that REITs produced superior total returns over five-, 10- and 20-year periods. Additionally, they attributed REITs’ outperformance to “superior operating results,” noting that REITs have seen higher profit growth in the last 20 years.
Kirby and Rothemund said their analysis was important in light of real estate’s upcoming move to a headline sector under the Global Industry Classification Standard (GICS).
“The pending inclusion of real estate as a new ‘sector’ (the highest strata) in the GICS system will undoubtedly cause diversified portfolio managers to pay more attention to the space going forward. Whether or not added attention begets increased allocations depends on whether the sector’s high multiples are justified,” they said. “The track record that REITs have now established over more than two decades of seasoning affords good insight on that critical question.”
(Contact: Allen Kenney at akenney@nareit.com)