Alex Pettee, CFA
The REIT Paradox: Cheap REITs Stay Cheap
The Real Estate Investment Trust industry has evolved considerably since the dawn of the 'Modern REIT' era in the early 1990s. REITs have evolved into dynamic growth-oriented operating companies.
Even as REITs have permeated into the mainstream, many of the traditional "style factors" and stock-picking techniques that work in other equity sectors haven't worked in the REIT space.
Counterintuitively, the evidence suggests that "high dividend yield" and "low valuations" as factors led to persistent underperformance in the REIT space while "growth" has been persistently undervalued.
In a business where "cost of capital" is the true competitive advantage and the driver of more than half of the sector's FFO growth, cheap REITs tend to stay cheap due to limited external growth potential.
Other factors that have exhibited persistent outperformance include balance sheet quality and property sector selection. We also identified a "sweet spot" of market capitalization that is associated with outperformance.