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Largest REIT stocks get more expensive as valuations outpace broader REIT sector

Investors are increasingly willing to pay a premium for blue chip REIT stocks. Share prices for the largest U.S.-based equity real estate investment trusts have grown considerably in 2019, with valuations outpacing the rest of the REIT sector by a wide margin.

As of Aug. 21, the 25 largest REIT stocks by market capitalization traded at a median 12.6% premium to their consensus S&P Global Market Intelligence net asset value estimates, a 12.1-percentage-point increase compared to the median 0.5% premium the same group of stocks traded at one year ago. This is a stark difference compared to the publicly traded REIT sector as a whole, which currently trades at a median 7.7% discount to NAV, a metric which has dropped 4 percentage points in the same time period.

Likewise, price-to-next-12-months-funds-from-operations multiples, another common REIT valuation metric, for the largest REIT stocks reached 22.1x as of Aug. 21, on a median basis. Over the past 12 months, the multiple grew 2.5x for the top 25 REIT stocks. As a comparison, the median price-to-FFO for the overall U.S. REIT sector was 15.3x on the same date, roughly in line with the year-ago level.

Among the largest REIT stocks, communications-focused SBA Communications Corp. trades at the highest price-to-FFO, at 31.6x. Manufactured home REIT Equity LifeStyle Properties Inc. and communications REIT American Tower Corp. follow, with multiples of 31.3x and 30.4x, respectively.

Meanwhile, healthcare REIT Welltower Inc. trades at the highest premium to its estimated net asset value of the group, at 44.3%, followed by single tenant-focused Realty Income Corp. and Equity LifeStyle at premiums of 42.0% and 40.2%, respectively.

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