The Upside-Down Value of REITs

The Upside-Down Value of REITs.

Contrary to popular investor assumptions, Top REIT performers tend to have:
– Lower dividend yields
– Lower leverage
– Lower capitalisation rates

Of the primary impacting factors that impact value, it is Mean Reversion that generates the highest returns in the REIT environment.

The commonly held beliefs of which factors contribute to generating returns from REITs have typically been attributed to High Yields, Medium levels of Leverage, and Mid – to High Cap Rates.

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In our current environment, the changing demographics brought on by an aging population has heightened the focus on post retirement income generation.

However, a decline in capital generation is a by-product of a fixation on yield and ultimately a deterioration in the ability to generate income of any consequence.

Investors scouring the REIT universe for yield typically behave to a large degree like Value Investors.

This however is the wrong approach, as highlighted by Green Street Advisors where their research clearly demonstrates that REITs with value characteristics tend to underperform their sector peers.

Nevertheless, this observation and evidence should in no way be construed as a contention that Value Investing is inappropriate for other sectors, but that REITs demand a specialised sector specific approach to finding value and delivering Alpha.

References:

Investopedia
Kirby, Mike and Rothemund, Peter. “The Factor Tracker.” Greenstreet Advisors – Heard on the Beach Series. 2018-01-11.
Graham, Benjamin. “The Intelligent Investor.” HarperBusiness, 1949.
Klarman, Seth. “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.” HarperCollins, 1991.

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