Paul Adornato, REIT analyst with BMO Capital Markets, spoke with 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.
BMO Capital Markets is a financial services provider that offers investment and corporate banking, advisory services, treasury and market risk management, institutional investing and research.
Adornato reflected on 2012 and said it's been an "interesting year for REITs." Specifically, he spoke about small cap REITs being undervalued at the beginning of the year when compared to their large cap peers.
"Then, within just a couple of months, the small cap names definitely caught up to the rest of the pack," he said. "Then we saw a period where the REITs overall were doing very well. Now most recently we see some concerns regarding the fiscal cliff as well as Europe."
Adornato said that while investors are still confident in REITs, those are some of the macro economic factors that could affect the REIT sector.
In terms of undervalued areas, Adornato pointed to the industrial sector. He said that even under a scenario of modest economic growth, his firm believes that industrial REITs will have good numbers.
"There's been very little new construction in the industrial space, so we have seen a very steady increase in occupancy over the last two years. We also have the effect of the above market rents kind of burning through and expiring, and being replaced by lower market rents," he said. "This means that we are going to see positive same store net operating income growth for the industrial names."
When discussing capital rising, Adornato said he has noticed a lot of debt refinancing at favorable rates, which has been accretive and positive for earnings. He added that REITs have also tapped the equity market appropriately.
"We think that REITs, overall, have gotten much better at their capital markets execution over time," adding that it has been a good period for REITs to shore up their balance sheets.
“They’ve seemed to do that pretty well," he said.