As the commercial real estate market began to recover and listed REITs enjoyed strong access to capital advantages, many in the industry forecast a wave of new REITs entering the public market. Keven Lindemann, director of SNL Financial's Real Estate Group, said the underperformance of recent initial public offerings may cause those planning to go public to take a second look.
"A relatively small handful of companies have outperformed that have come public in the last 15 months," Lindemann said, adding valuations could also be causing the IPO market to sputter. "Valuations are certainly increasing on the direct side. Many people think valuations are increasing at a faster pace on the direct side than they are on the public side as well as REITs have performed over the past two years."
Lindemann said he expects the larger companies that were taken private during the last wave of privatizations (Archstone, Hilton, Equity Office Properties) to successfully tap the public markets.
"They have intact, very well-known management teams, good quality assets and well-defined strategies," Lindemann said. "But I wouldn't be surprised to see some of the smaller, lesser-known companies take the private route."
Listed REITs have been so successful coming out of the great recession in large part due to their ability to access the public equity and debt markets. For that trend to continue, Lindemann said, companies will have to show effective use of the capital raised.
"If the companies have a very well-defined use of this capital that goes beyond fixing the balance sheet and saving for a rainy day, then I think they will be able to continue to access the public markets," he said.
When it comes to the question of REIT share price valuation, Lindemann said the market is forward looking and there is a belief that we are at the start of a real real estate recovery. "Many investors are willing to bet that these professionally managed portfolios of high-quality assets are going to be the real beneficiaries. And when you add in the fact that these REITs have been able to fix their balance sheets and have fairly open access to capital, when acquisitions come available REITs will be able to capitalize."
From that standpoint, if you are expecting earnings to turn around, REIT shares are likely fairly valued and there may be room to grow, Lindemann said.
With first quarter earnings reporting in full swing, Lindemann said the market had fairly modest expectations given the belief that the recovery is in its early stages, but the companies have been able to exceed those expectations.
"Going forward, I think what we need to see are more significant earnings growth," he said. "You can't always bet on the future. If the future never actually comes, investors could get frustrated."