REITs’ rare earnings multiple discount to stocks is historically compelling

REITs’ rare earnings multiple discount to stocks is historically compelling

10 minute read

June 2024

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U.S. equities have outperformed U.S. listed REITs substantially over the past few years. But history suggests that the resulting valuation gap between equities and REITs indicates a likely reversal.

KEY TAKEAWAYS

  • Stocks have outperformed listed REITs for an extended period, a trend we believe is unsustainable.
  • REITs, which have historically traded at an earnings multiple premium to stocks, are currently at a discount, which is a rare occurrence.
  • Historically, such discounts have been followed by periods of REIT outperformance.

How we got here

U.S. equities have had solid performance in the past five years, generating an annualized total return of 13.2% through April 2024, in a rally mostly powered by multiple expansion on a handful of AI-related stocks. U.S. listed REITs, by contrast, had an annualized return of just 2.3% over this period.

Where stocks and REITs stand today

The outperformance of stocks vs. REITs has resulted in a historical anomaly— REITs trading at a cash flow multiple discount to stocks. Such occurrences have been rare—in the past 20 years, only seen in the post-global financial crisis and post-pandemic periods.

U.S. REITs on average have historically traded at a 2.7x earnings multiple premium to broad U.S. stocks, which we believe is warranted due to REITs’ rent-based recurring cash flows. With REITs currently at a -1.7X discount, any reversion toward the average could benefit performance.

EXHIBIT 1
Stocks surge away from REITs

5 year period

Stocks surge away from REITs

At April 30, 2024. Source: Cohen & Steers, Morningstar.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not represent the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance listed above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. See end notes for index associations, definitions and additional disclosures.

EXHIBIT 2
REIT valuations vs. stocks are meaningfully below the historical median

U.S. real estate vs. U.S. equities earnings multiple spreads,(1) January 2005 – March 2024

REIT valuations vs. stocks are meaningfully below the historical median

At March 31, 2024. Source UBS, Bloomberg, Citi Research – US Equity Strategy, and Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The information presented above does not represent the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance listed above. (1) (FFO) Funds from operations is the REIT industry’s key earnings metric. It is calculated as GAAP net income, plus real estate gains (minus real estate losses), plus GAAP real estate depreciation and amortization. The price/earnings ratio (often shortened to the P/E ratio or the PER) is the ratio of a company’s stock price to the company’s earnings per share. Earnings multiples are the ratio of a company’s share value to the amount of profit it makes in a particular period, whether paid out in dividends or not. 2024 multiples shown are forward looking for the current year. (2) U.S. real estate represented by UBS’ coverage universe of U.S. real estate companies from January 2005 to December 2010; data thereafter shows Cohen & Steers coverage universe.

What we can learn from history

While past performance does not guarantee future results, the current valuation differential suggests the potential for REIT outperformance in the next one to three years.

The valuation gap between U.S. stocks and REITs has only been near or greater than this level three other times in recent history: 2003 (–4.9x), 2009 (–4.0x) and 2020 (–1.5x). On average for these three starting points, U.S. REITs outpaced stocks by 29.8% in the one-year following period and by 10.4% in the three-year period. And Cohen & Steers’ flagship U.S. REIT mutual fund mostly performed better still (Exhibit 3).

EXHIBIT 3
REIT performance in the wake of previous multiple discounts to stocks

Forward total returns

REIT performance in the wake of previous multiple discounts to stocks

At March 31, 2024. Cohen & Steers, Bloomberg.
Data quoted represents past performance, which is no guarantee of future results. Risk of loss is possible. Performance returns for CSRSX stated net of fees. Current performance may be lower or higher than the performance quoted. The investment return and the principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. An investor cannot invest directly in an index, and index performance does not reflect the deduction of fees, expenses or taxes. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. See end notes for index associations, definitions and additional disclosures.

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Listed REITs now stand at –9.1% year to date through April as the market has continued to price in a “higher for longer” interest rate environment. Notably, however, REITs remain nearly +14% above their October 2023 trough (following a substantial 2023 year-end rally). Overall, we believe investors should see pullbacks as opportunities.

While REIT performance in the past few years has been hindered by concerns about higher financing costs, commercial real estate company balance sheets remain generally strong, with leverage well below levels seen in the wake of the global financial crisis. At the same time, fundamentals remain solid in most property sectors, with steady demand and limited new supply. In our view, these factors—along with REITs’ current earnings multiple discount—create the potential for better relative performance.

Total returns (L share class)

Cohen & Steers Realty Shares Class L (CSRSX)

At March 31, 2024. Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results. Risk of loss is possible. Performance returns stated net of fees. Current performance may be lower or higher than the performance quoted. The investment return and the principal value of an investment will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Periods greater than 12 months are annualized. Returns are historical and include changes in share price and reinvestment of all distributions.
There is no guarantee that any investment objective will be achieved. Gross Expense Ratio Class L: 0.94%. Net Expense Ratio Class L: 0.88%, as disclosed in the May 2024 prospectus. During certain periods presented above, the Advisor waived fees and/or reimbursed expenses. Without this arrangement, performance would be lower. Since inception for FTSE Nareit Equity REIT Index is calculated from nearest month-end. (1) Linked Index: Prior to 3/31/2019, the index was the FTSE Nareit Equity REITs Index. Thereafter, it is the FTSE Nareit All Equity REITs Index. An investor cannot invest directly in an index, and index performance does not reflect the deduction of fees, expenses or taxes.

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