Why would a REIT be overvalued?
Consumer confidence drives the market. Companies can maintain solid performance, but during uncertain economic conditions, share values can drop. Conversely, overconfidence in a given sector or company can result in share prices trading above its current performance. Right now, as the country and real estate market is recovering from the COVID-19 pandemic, certain industries are dominating, backed by trends that show long-term demand in the future, which is driving confidence and value in the sector up.
Terreno Realty is an industrial REIT specializing in warehouse and distribution centers in six major markets, which include New York/New Jersey, Washington D.C., Miami, Los Angeles, San Francisco, and Seattle. The company owns 13.7 million square feet of industrial space spread across 228 properties. Industrial real estate is experiencing a renaissance, with record-high demand, particularly for warehouse and logistics distribution centers, driven by e-commerce and digital technology.
Industrial real estate was one of the few sectors that saw returns increase during the pandemic rather than flatten or decline, which drove attention and dollars to this sector. This, in addition to the clear long-term demand and growth opportunities in this sector, has caused a number of industrial REITs to be overvalued. Right now, Terreno Realty's price-to-FFO (funds from operations) ratio is 43 times, which is extremely high by normal REIT standards, which usually falls between 10 to 30.
SBA Communications Corp.
We live in a digital age dominated by computers, cell phones, and television. Data and the ability to communicate that data are imperative for operating today, which is why communication infrastructure REITs like SBA Communications Corp. are seeing strong demand right now.
SBA Communications Corp is one of the largest international communications and cell tower companies in operation. The company has had incredible success over the past five years, with returns exceeding the S&P 500 by 54%.
Even now, the company boasts a strong start to the year, with adjusted funds from operations (AFFO) increasing 16.2% year over year. It's clear this strong performance and long-term confidence in the dependence on cell towers and digital communications has resulted in the company's share prices to outpace its performance. The current price-to-FFO is over 33 times, which is above the industry average range of 10 to 30.
Camden Property Trust
Camden Property Trust is a residential REIT that specializes in the development, acquisition, and management of apartment communities in 15 major metro markets across the United States. Camden is almost exclusively located in the Sun Belt region, with properties in markets like Austin, Texas; Charlotte, North Carolina; and Tampa, Florida, that are experiencing tremendous inward migration, which is pushing consumer confidence for the long-term potential for the company. Being a more affluent multifamily operator who rents to middle- and higher-income-earning tenants, it has less exposure to pandemic-related delinquencies.
The company, which currently has interest or ownership in 167 communities that are a mix of class A and class B apartments in urban and suburban areas, is 97% occupied and managed to collect 94.8% of rents in May 2021. Despite this, AFFO, net operating income, and earnings per share are down year over year. It seems investors are betting big on the Sun Belt region despite the company's recent shortcomings, and this is the reason the company has a price-to-AFFO of over 32 times.
The Millionacres bottom line
Just because a company is overvalued doesn't mean it's not a worthwhile investment in the long term. The companies listed above are all great companies with solid portfolios in markets that have strong growth opportunities. There's a reason people are so interested in buying them right now. Being patient and waiting for prices to recorrect as they relate to the value the company is producing at the given time means you aren't overpaying.