Burl East is a very experienced participant in and student of the real estate industry. As CEO of American Asset Capital Advisers (AACA), he is the sub-adviser for the Altegris long/short real estate strategy, of which REITs are an important part. He has recently written a blog for the AACA website on REITs and how they have historically traded relative to actual net asset values. Burl spends a lot of time looking at individual real estate companies, many of which are REITs, running long only separately managed accounts and, for us, looking at both sides of the markets—long and short—for opportunities. He makes an interesting case about the historical patterns of REIT stock performance relative to net asset values. Worth paying attention. —Jack Rivkin
Net asset value (“NAV”) is one of the core valuation metrics for real estate investment trusts (“REITs”). The metric aims to determine the inherent value of a REIT by assigning approximate liquidation values to the underlying real estate. To do so, investors must derive a series of go forward expectations such as net operating income (NOI) and cap rate assumptions to estimate a current market value of the underlying real estate.
As one may expect, general bouts of market volatility allow for share prices of publically traded REITs to deviate from their underlying net asset value. Thus, REIT shares typically trade at either a premium or discount price to net assets value (“P/NAV”). Generally, whenever REITs are trading at an elevated premium P/NAV, we expect lower go forward rates of return; and whenever REITs are trading at a deep discount P/NAV, we expect go forward rates of return to be higher. Fluctuations in P/NAV can create opportunity when REITs are trading at a premium to consider reducing positions or consider incorporating hedges, particularly in those REITs that are poorly positioned in their respective markets. Additionally, as evidenced by the recent pick up in announced REIT M&A activity, P/NAV discounts can grant opportunity to a variety of external buyers. These opportunistic buyers can generate a profit by selling off individual assets in the private market at an amount greater than the price they paid for the company in the public market. Hence, all else being equal, we believe it to be prudent to invest in REITs when they are trading at a discount P/NAV.
The SNL US Equity REIT Index (“REIT Index”) P/NAV has historically been somewhat mean-reverting with share price trading within a band of the underlying NAV. Looking at the “post-financial crisis” time period (trailing five years, 4/30/10 to 3/31/15), the mean P/NAV of the REIT index over this period was a 6.3% premium. As of the most recent month end (9/30/15), The REIT index was trading at an 8.5% discount to NAV (about 14.8% below the REIT index’s mean P/NAV for the trailing 5-year period studied).
In the study time period, when the REIT Index was trading at a discount P/NAV, the forward six-month returns of the REIT Index were positive 100% of the time. When the REIT index was trading at a premium P/NAV, the forward six-month returns of the REIT Index were positive 73% of the time during the study time period. Negative forward six-month returns of the REIT Index during that period only occurred when the REIT Index had been trading at a premium P/NAV.
As of the most recent month end (9/30/15), the REIT Index was trading at an 8.5% discount P/NAV, which we believe may suggest a positive forward six-month return.
This is a summary and does not constitute an offer to sell or a solicitation of any offer to buy or sell any securities. The performance data featured in this document represents past performance, which is no guarantee of future results. Views are as of the dates indicated and are subject to change at any time based on market and other conditions. All data in this document, including that used to compile performance, is obtained from sources believed to be reliable but is not guaranteed. Data is unaudited.
This document may contain forward-looking statements that are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. The following factors, among others, could cause actual results to differ from those implied by the forward-looking statements in this presentation: changes in general economic conditions; changes in specific real estate markets; legislative/regulatory changes (including changes to laws governing the taxation of real estate); and changes in generally accepted accounting principles, including policies and guidelines applicable to real estate funds. While forward-looking statements reflect American Assets Capital Advisers, LLC’s (“AACA”) good faith beliefs, assumptions and expectations, they are not guarantees of future or actual performance. Furthermore, AACA disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, or new information, data or methods, future events or other changes.
The SNL US Equity REIT Index. The SNL US Equity REIT Index (“REIT Index”) is an index comprised of all the publically traded US equity REITs and is considered to be generally representative of the US real estate market as a whole. Results for the REIT Index include dividends and the reinvestment of all income and are presented gross of fees. At times, the volatility of your investment may be greater than the volatility of the REIT Index. Unlike the REIT Index, your investment may be actively managed.