Why invest in listed REITs today

Transcript

Turning to the case for investing in REITs right now, we think it comes down to three reasons.

First, REITs have outperformed stocks and bonds when yields and growth move lower, which is important to note given we believe that the rate-hiking cycle is likely ending and growth is likely to slow.

U.S. REITs have delivered 19.5 percent average annualized monthly returns in periods when both growth and yields have declined.

EXHIBIT 1

Lower growth and lower yields have been a favorable backdrop for listed REITs

Average annualized monthly total returns, January 1990 – December 2023⁽¹⁾

At December 31, 2023. Source: Bloomberg, Morningstar, and Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results.
U.S. REITs represented by the FTSE Nareit All Equity REITs Index. U.S. equities represented by the S&P 500. U.S. fixed income represented by the U.S. Investment Grade Corporate Credit.
(1) Analysis uses real yields to calculate the four growth and yields economic environments.  

That’s particularly notable given we believe we are shifting away from a period of slowing growth and higher yields when REITs have underperformed.

Second, demand is healthy, albeit decelerating as the economy slows, but cash flows remain relatively strong and resilient.

Supply, on the other hand is constrained amid higher rates, tightening lending standards, and collapsing developer profit margins.

EXHIBIT 2

REIT valuations vs. equities are meaningfully below the historical median

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

At February 29, 2024. Source UBS, Bloomberg, Citi Research – US Equity Strategy, and Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results.
(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. (3) The S&P 500 Index is an unmanaged index of 500 large-cap stocks that is frequently used as a general measure of stock market performance.  It includes 500 large-cap stocks, which together represent about 75% of the total U.S. equities market. To be eligible for addition to the S&P 500, companies must have a market capitalization of at least US$4 billion.

Third, REIT valuations relative to the broader equity market are meaningfully below the historical median.

The current spread between U.S. REITs and U.S. equities of -1.1x is at a level only recently seen at the peak of the pandemic and also in the wake of the financial crisis.

EXHIBIT 3

Increased home ownership costs and demographic trends support single family for rent

Homeownership affordability nationally is to the lowest level in the last decade
January 2003 – December 2023

At December 31, 2023, unless otherwise noted. Source: Cohen & Steers, Green Street, National Association of Realtors. Data quoted represents past performance, which is no guarantee of future results.
(1) Homebuyer Affordability Fixed Mortgage Index per National Assoc. of Realtors through Bloomberg. Latest data available is through April 2023.

When it comes to specific property sectors, we favor those with pricing power, or the sustained ability to command higher rents.

Supply and demand are the key drivers here.

One major factor is demographic shifts.

For instance, there are segments of the housing rental market where demand is high as millennials hit an age where they are seeking more space and good school districts to raise families.

But home ownership affordability is at its lowest level in a decade.

EXHIBIT 4

Data centers experiencing record fundamentals

At September 30, 2023, unless otherwise noted. Source: Cohen & Steers, CBRE
There is no guarantee that any market forecast set forth in this presentation will be realized. The mention of specific sectors is not a recommendation or solicitation for any person to buy, sell or hold any particular security and should not be relied upon as investment advice.
(1) Data available is as of June 30, 2023.

Similarly focused on demographics, senior housing should see strong longer-term occupancies and cash flow as high demand meets lagging supply.

The proportion of the population over 80 is climbing, while supply in senior housing is 70 percent below its peak.

Cloud computing, streaming, social media, and gaming are notable secular shifts that have already been driving demand.

Artificial intelligence is accelerating that trend.

That is a key reason data centers are seeing rental growth on average around 20 percent and very low vacancy rates.

Another key point in our outlook is that listed REITs have been net sellers of assets since 2015.

But we expect this to shift.

During 2000 to 2004 and again in 2010 to 2014, listed REITs net acquired assets as premiums to net asset value afforded them an attractive cost of capital.

EXHIBIT 5

Listed REITs have historically acquired assets in similar market conditions

At December 31, 2023. Source: Green Street, Real Capital Analytics, Cohen & Steers.
Data quoted represents past performance, which is no guarantee of future results.
(1) Listed real estate represented by the FTSE Nareit All Equity REITs Index which contains all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria
(2) Each time period represents different business cycles as defined by Cohen & Steers.

We think this scenario can happen again.

The listed markets leads private in asset value recovery, while higher financing costs, more restrictive lending and slowing growth will likely add to pricing pressure in the private market.

REITs, which primarily finance themselves in the corporate unsecured market not the bank market, should be able to take advantage of acquisition opportunities given their access to cheaper debt and equity.

We believe this should contribute to a favorable environment for REITs.

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