Choose Your Own Adventure
US REITs, as a group, achieved their highest P/FFO multiple  ever in late January 2015 at 17.8x. The previous high was reached at the peak of the last cycle in early February 2007 (17.6x). After peaking in January 2015, the group multiple contracted 4.3x to its nadir in mid-August (13.5x) and since has recovered to just over 15.0x, the group’s five-year average P/FFO multiple.
Figure 1: US REIT Historical P/FFO Multiple (Consensus, 12-mo fwd)
Looking back historically, we identified eight instances where US REIT P/FFO multiples contracted by at least 2.0x from interim peak to interim trough. Average price returns subsequent to the contractions were very attractive with the exception of the two instances with starting points in 2007, the year REITs peaked last cycle (Figure 2). Using history as a guide, US REIT returns over the next six to nine months could be very attractive unless of course the cyclical peak was put in place earlier this year. All bets would be off in that scenario.
Figure 2: US REIT Price Returns Subsequent to Establishment of Interim Trough Multiples
The Road Less Traveled
US REITs have traded at a 12-month forward P/FFO multiple of at least 15.0x on 823 trading days since mid-October 2003 out of a possible 3,055 trading days. Prior to the initiation of the Federal Reserve’s Zero Interest Rate Policy (ZIRP) era (Dec 2008), the group traded at those levels on only 195 days, or 24%, of total instances. So 76% of all instances of US REITs trading at a P/FFO multiple of at least 15.0x occurred during the ZIRP era.
Looking at it through a different lens, US REITs traded at a 15.0x P/FFO multiple or higher on 15% of total possible trading days from mid-October 2003 to the end of December 2008. Since December 2008, US REITs have traded at a 15.0x P/FFO multiple or higher on 36% of total possible trading days.
If we are truly starting to exit the low interest rate era and entering a more inflationary period, will REIT multiples contract to more cyclically appropriate levels or have REITs become mainstream enough that the past five years are representative of the road ahead?
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