News Release: Large-cap REITs finished 2013 with stronger performance and currently trade at higher multiples than small-cap and mid-cap peers.

SNL Real Estate: Large-Cap REITs Outshine Smaller-Cap Peers

A recent Alliance Bernstein blog noted that, since 1992, small- and mid-cap real estate companies’ stocks have collectively delivered higher returns than those of their large-cap peers. The author noted that additional value could be found in the small- to mid-cap real estate stocks, as global real estate equities appear to be on track for more “normal returns” after a strong five-year run.

The blog suggested that “action in the real estate equity space is dominated by a small band of very large stocks, which get a disproportionate share of Wall Street Analyst coverage.” Average analyst coverage of the equity REIT space does indeed grow with the size of those companies. REITs with a market cap of less than $1 billion are, on average, covered by four analysts each. At the other end of the spectrum, REITs with a market cap of at least $10 billion have an average of 17 covering analysts. On average, there are three more analysts covering REITs with a market cap greater than $10 billion versus those with a market cap between $5 billion and $10 billion.

Valuation metrics for equity REITs confirm that large-cap companies are trading at higher valuations than small- and mid-cap REITs. While REITs with a market cap under $1 billion are trading at a median discount to NAV of negative 9.5%, those with a market cap greater than $10 billion trade at a premium to NAV of 1.4%.

Forward FFO multiples show a similar trend, with median price to 2014 FFO estimates moving from 13.7x for REITs with a market cap less than $1 billion to 19.1x for REITs with a market cap greater than $10 billion. This indicates that the market is willing to pay more for each dollar of earnings from large-cap REITs than for smaller-cap peers. The difference in multiples between those REITs with a market cap greater than $10 billion and those with a market cap between $5 billion and $10 billion is 3.2x.

Median dividend yields for REITs decrease as companies grow in size. REITs with a market cap under $1 billion provide median yields of 4.5%, while those REITs with a market cap greater than $10 billion provide the lowest median yield, at 3.1% as of April 3. Decreases in share prices appear to have contributed to higher yields for small-cap REITs, as those REITs with a market cap less than $1 billion have provided investors with a median one-year total return of negative 1.8%. At the other end of the spectrum, REITs with a market cap greater than $10 billion have provided investors with a median one-year return of 6.5%. In general, the REIT market has underperformed the S&P 500’s 24.2% total return over the last year.