REITs have been the top-performing asset class in eight of the past 22 years and are currently trading at substantial discounts, presenting a compelling investment opportunity for advisors.
In the November 14 webcast, REITs: Property at a Discount, Craig Leupold, CEO at GSI Capital Advisors, Nick Tannura, CIO at GSI Capital Advisors, Eric Hewitt, CIO at SS&C ALPS Advisors, and Tom Lydon, vice chairman of VettaFi, discussed the differences between public and private market pricing of real estate assets and the fundamentals of the sector.
The ALPS Active REIT ETF (REIT), launched by SS&C ALPS Advisors in February 2021, is sub-advised by GSI Capital Advisors. Active management has proven to be very successful in the real estate sector as managers have the opportunity to capitalize on dislocations in the REITs market, Hewitt said during the webcast.
“In the last three years, 83% of active managers have outperformed their passive benchmark, and that number really doesn’t go down much over time – on five-year and 10-year bases,” Hewitt said.
There are several reasons to consider adding exposure to public REITs to a portfolio, particularly now while high inflation and challenges in equity markets are likely to persist.
REITs notably have very low correlations to other asset classes, but very high correlations to private market real estate. Leupold said they see real estate and REITs as a hybrid or a proxy between bonds and equities in that they offer a good initial yield, but at the same time, offer the growth characteristics that come from owning real estate.
“So, in addition to providing diversification benefits, they actually provide very attractive absolute returns and relative returns,” Leupold said. “Publicly traded REITs offer a dividend yield of just north of 4%.”
GSI Capital Advisors believes public REITs are the better vehicle for most individual investors. Through the end of 2021, REITs have outperformed private real estate over three, five, 10, and 20-year periods. This is particularly interesting when considering the fact that public REITs offer much greater liquidity, real-time transparent pricing, and typically more conservative capital structures, according to Leupold.
Periodically, REITs prices can drift from the underlying net asset value of the real estate assets. They can trade at premiums or they can trade at discounts to net asset value and book value, Lydon said.
“If you look at REITs in aggregate, they’re trading at about a 20% discount to underlying real estate value,” Leupold said. “Historically, REITs traded at an average premium of about 3%. So you can buy a REIT today at a significant discount to where they have traded historically, relative to underlying real estate value.”
Leupold said in prior periods where REITs have traded at such significant discounts, they have outperformed private market real estate and have actually gone on to generate good absolute and relative returns compared to private market real estate.
“History has taught us that REIT prices and private market prices must converge,” Leupold said. “Whether that occurs as a result of increases in REIT share prices, or a decline in private market real estate values or some combination of both is yet to be seen.”
The fundamentals for real estate are quite healthy and Leupold said the firm sees good cash flow growth opportunities for both public REITs and private real estate generally. However, there are some property sectors that are facing headwinds.
Tannura pointed to office, which is the largest discount at 43%. “Interestingly enough, we do not think it’s a great value and we’re not overly tempted to go there,” Tannura said, explaining office is one of the property types that requires a lot of CapEx to maintain or lease to get new tenants in, which doesn’t reward investors.
“The returns on office tend to be lackluster in our view,” Tannura said.
Tannura said they like lodging, which is a 30% discount, and it has been the best-performing property type.
“It’s recovering out of the depths of the pandemic. Vacation travel has probably somewhat fully recovered,” Tannura said. “Business travel is still recovering and there’s still upside. It may not reach where it was but…people are traveling, we’re all getting out.”
Apartments and industrial apartments are at 30% discounts, and industrial is 20% discounted. Tannura said these are good businesses and property types. “We think arguably these discounts represent oversold areas and opportunities.”
Financial advisors interested in learning more about REITs and the real estate sector can watch the webcast here on demand.