As previously reported on BRIDGE, the impact of the most rapid tightening cycle in decades on the residential construction industry was less severe than anticipated, primarily due to proactive measures taken by homebuilders with stronger balance sheets to mitigate financing costs for homebuyers. Consequently, demand was sustained beyond the initial pandemic-induced drivers related to remote and hybrid work trends.

These tailwinds and unique factors also extended to residential-focused REITs, which manage the complete life cycle of investment, including acquisition, development, and management.

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

As a result, the 5-year price chart indicates a less pronounced correction compared to office and retail REITs, which were more adversely affected by macroeconomic headwinds. This has led to a lag in performance against the market during a critical, speculative cycle, constraining the industry's ability to navigate the transition from an easing monetary policy.

Beyond the relatively strong performance of residential REITs in a rising interest rate environment, the REIT-industrial sector—comprising self-storage facilities, industrial sites, and warehouses—has demonstrated similar resilience.

Unlike the office and retail sectors, which experienced temporary headwinds, and residential REITs, which benefitted from pandemic-related tailwinds, the REIT-Industrial sector remained relatively unaffected. Over the six quarters following the pandemic, shifts in consumer work-life balance had minimal impact on industrial activities.

As a result, sales growth in this sector was organic and remained robust over the past four years, while cyclicality was more evident in office and retail REITs.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Furthermore, the higher and more stable operating margins—particularly when contrasted with office REITs—further clarify the disparities in performance. In addition to higher margins, the REIT-industrial sector's lower debt profile and superior debt-service ratios have contributed to its outperformance relative to the office REIT sector.

As the transition to a more accommodative monetary policy continues, the increasing valuation spread, as evidenced by the widening price-to-sales ratio between REIT-Office and REIT-Industrial, may present an opportunity for an arbitrage play.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA