Josh Olazabal, vice president and credit analyst with PIMCO, joined REIT.com for a video interview at REITWorld 2012: NAREIT’s Annual Convention for All Things REIT at the Manchester Grand Hyatt in San Diego.
Olazabal offered his assessment of the REIT industry’s performance during the financial crisis.
“At PIMCO, we talk about REITs having been resilient. We felt that the REIT model made a lot of sense and would perform well, but, at the same time, the model had never necessarily been stressed,” Olazabal said. “I think what we saw during the downturn of 2008 and 2009 is that the model was actually stressed by one of the worst downturns that we’re likely to see. It proved remarkably resilient during that period.”
What makes REITs so resilient? Olazabal shared his thoughts:
“At PIMCO, we talk about the REIT model and we talk about a number of things that, together, create something that is resilient. When I talk about the model, I talk about the ‘covenant package.’ REIT bonds typically come with a covenant package that limits debt incurrence. That essentially limits the amount of total debt that a REIT can have and secured debt that a REIT can have. During the downturn, we saw that those limitations on debt basically kept the companies from going overboard and essentially ensured that they would be viable through the downturn.”
Olazabal also noted that REIT tend to invest in “high-quality properties” in a given market. Longer-term leases also protect REITs during economic downturns, according to Olazabal.
“The amount of [net operating income] that is exposed at any given time is less than otherwise would be the case,” he said.
Olazabal discussed the perception of REITs in the investment marketplace.
“On the fixed income side, you look at, before 2008 and 2009, a very narrow universe of REIT bond buyers. As is the case with PIMCO and some of our peer firms, you’ve seen that expanding over the last couple years as people have become more and more convinced that the model itself works,” he said.
Looking ahead to 2013, Olazabal said he expects more of the same: “REIT management teams looking to take advantage of a very good rate environment.”