Listed REITs Are Valued at a Median Premium to Net Asset Values
January 17, 2022 | James Sprow | Blue Vault
A clear indicator of the public market’s optimism for commercial real estate valuations is the median 3.1% premium to consensus S&P Global Market Intelligence net asset value (NAV) per share estimates as of January 3, 2022. Among the sectors that were priced at the highest premiums to NAV were Farmland (+40.6%), Communications (+31.7%), Data Center (+27.4%), Self-Storage (+14.3%) and Industrial (+13.1%).
On the other side of the spectrum, office REITs traded at the largest discount to NAV at a median discount of 22.1%. Following closely behind are hotel and regional mall segments with median discounts of 16.7% and 14.1%, respectively.
The overall median for all sectors of listed REITs at 3.1% was up from a median discount to NAV of 3.9% as of January 2021. This 700 bps swing in median valuation relative to NAVs illustrates a strong return to confidence in the commercial real estate sector by investors in listed REITs.
Source: S&P Global Market Intelligence
At the beginning of 2021, Data Center REITs were trading at just a 13.1% premium to estimated NAVs, followed by Self Storage at 12.7%, Healthcare at 11.2% and Hotel REITs at 9.0%. The sharpest drop in confidence was in the Hotel REIT sector, where between December 31, 2020 and January 3, 2022, the relative pricing fell from a premium to NAVs of 9.0% to a discount of 16.7%, a downward swing of 25.7%. Clearly, investors in the Hotel sector with its 12 listed REITs were disappointed in the returns to profitability in 2021. The new waves of COVID variants have hurt the travel and hospitality sectors, torpedoing the confidence in a rebound, at least temporarily. Shopping Center REITs, Regional Malls and Office REITs were still selling at steep discounts to NAV, although there has been some recovery in pricing. Shopping Centers were at a 16.0% discount to NAV at the end of 2020 and have narrowed that discount to 8.0% as of January 3, 2022. Regional Malls were at a 28.3% discount, narrowing to 14.2%, and Office REITs were at a 30.2% discount, narrowing to 22.1%, still the steepest discount to NAV of all REIT sectors.
The return to offices that was anticipated in the fall of 2021 has been slowed to a halt by the Omicron variant of COVID-19. The acceleration of remote work occasioned by the pandemic has thrown into question the future of office workforces. Blackstone recently announced that their employees must be vaccinated and boosted in order to return to the office, and tested three times each week. That type of response to the surge in variant infections is not the exception among office employers, and it is certain to cause the trend to working from home for many employees to remain significant.
A recent article in the WSJ states that real estate investors are pulling cash out of offices and putting it into data centers as a hedge against the impact of remote working. Interest in data centers has been growing for years, but took a big leap forward as the pandemic pushed more daily life online. Global internet traffic increased 48% in 2020, and 23% in 2021, as office workers were forced to do their jobs from home. The extra online activity has translated into strong demand for data storage. Despite this surge in demand, data center real estate delivered total returns to investors from February 2021 through January 6, 2022, of just 30%, far below the S&P 500’s 48% returns. Oversupply could become an issue in some cities.
Sources: S&P Global Market Intelligence, WSJ
