Scott Craig, portfolio manager with Eaton Vance, an investment management firm, 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.
Craig discussed lessons that REITs have learned since the financial crisis.
"I think there's been a really healthy change of thinking that's gone on in the REIT sector since the financial crisis," he said, adding that in the past many companies tried to grow their asset base as much as they could while issuing as little equity as they could.
He said since the financial crisis, today’s investors and companies are more comfortable issuing equity if they have good growth opportunities and if the shares are reasonably valued relative to intrinsic value.
"So you see the better companies growing their asset bases and doing it with equity in a way that maintains balance sheet leverage or even delevers over time,” according to Craig.
REITs have been actively raising capital and Craig said some asset classes are using it for development and acquisitions. However, he explained that he doesn't expect a large increase in mergers and acquisitions.
Craig said there are barriers to M&A and in order for it to "make sense" the target has to be trading cheaply enough that the target sellers can “get a big enough premium to be happy” while the buyer still the buys the assets at cheap enough price to make money.
"That's a gap that often can't really be bridged," he said, adding that there are also social barriers to M&A with CEO's not wanting to sell out.
When it comes to issues of concern to commercial real estate investors, Craig said that job growth tops the list. While he said there's not a lot of supply among most property types, all of the sectors need job growth in order for the recovery to continue.
Sector wise, Craig is most bullish on the apartment sector and less favorable on the health care sector.
"I really like the apartment sector. I think that the stocks are trading cheaply on an NAV basis and I think that investors are generally over estimating the general impact of a recovering single family housing market," he said. "In the health care space, I think some of the risk inherent in the triple net leases is not well understood."