Amid the backdrop of growing investor concern surrounding the volatility in the broader market, REITs can offer some added measures of stability, according to Michael Hudgins, real estate strategist with JP Morgan Asset Management.
“I think there’s a lot about REITs that is stable,” he told REIT.com in a video interview at REITWeek 2012: NAREIT’s Investor Forum. “One would be just the platform itself, the business. Another is that the teams are fantastic. On average REIT management are usually strong business people so that gives you some stability."
Hudgins said when speaking of stability it’s also worth pointing out that over a five-year period, when share prices for REITs were going down; the income was still strong enough to deliver annualized positive returns for investors.
However, he said he is concerned about the amount of leverage for REITs. He said he would like to see debt to EBITDA, (Earnings Before Interest, Taxes, Depreciation and Amortization) for REITs come down.
“It used to be four times EBITDA in the early to mid-1990s. Now you see it still at around 6.5 to 7,” Hudgins said, adding that REITs should be targeting 5 to 5.5 times EBITDA.
Hudgins also discussed the findings in a recently published paper by JP Morgan highlighting the role of REITs in an investment portfolio.
He said there were several key findings in the paper including what he called an “interesting and unique analysis that demonstrated once again that REITs over the long term will act like and deliver returns like real estate.”
Other findings include that REITs are very similar to core real estate funds in terms of the quality of where those properties are located and the amount of assets in development.
In terms of how non-income oriented investors should view REITs, Hudgins said while everyone knows investors like REITs for their yield, he thinks there’s more to that story.
“The way I like to think about REITs is they are real estate, period. REITs delivers more for investors and gives you bond-like yield,” he said.
However, he said, in times of economic growth REITs can generate equity but bonds don’t handle inflation well.