Todd Kellenbarger, REIT Client Portfolio Manager at Principal Asset Management, was a guest on the latest episode of Nareit’s REIT Report podcast.
Kellenbarger said listed REITs currently trade at significant valuation discounts to both equities and private real estate. He pointed out that the earnings price multiple of REITs versus equities today is more than two standard deviations above the long-term average – “a level that is even cheaper than what we saw during the GFC, especially for US listed REITs.”
Meanwhile, he said, given valuation-based methods and limited price discovery in today’s transaction markets, changes in valuations for private real estate have been slower than for listed REITs.
“The current implied cap rate at which REITs trade suggests quite attractive return premium potential on private real estate today. “Looking to the future, the valuation gap between the private and public real estate markets means that convergence trading actually favors public REITs,” Kellenberger said.
Elsewhere in the interview, Kellenbarger said that:
- While capital markets activity has slowed this year, REITs have continued to make acquisitions or finance projects with debt or equity capital.
- Principal expects that until bank balance sheet issues are resolved, tighter lending conditions and less available capital for real estate may persist. Until then, expect some sluggish real estate transaction markets and pressure on values.
- The principal’s investment approach emphasizes flexibility for difficult macroeconomic conditions anticipated ahead. “We are expressing a preference for companies with flexible pricing power, low economic sensitivity and favorable risk appetite for those structural growth drivers.”
- Banks and real estate equity holders will have to start accepting the pain that has already been priced into listed REITs. At current interest rate levels, real estate values should decline. “When that happens, we will see more willingness to lend and the transaction market will pick up. This will help pave the way for capital to come back into the real estate market.