REIT executives, industry analysts, and portfolio managers gathered to discuss the state of the industry during a lunch general session on the first day of REITworld: 2019 Annual Conference in Los Angeles.
Moderated by A. William Stein, CEO of Digital Realty Trust, Inc. (NYSE: DLR), topics under consideration included the economy, mergers and acquisitions (M&A), valuations, and industry disrupters.
Owen Thomas, CEO of Boston Properties, Inc. (NYSE: BXP), said that while the economy is slowing, consumer confidence remains at a relatively high level. He noted that the last three recessions saw 10-year Treasuries at “much higher levels” than they are today. “When this recession ultimately does hit us, I do think this is a cushion for real estate values,” he said.
Thomas Grier, managing director & group head of REALIB at J.P. Morgan Securities, added that market variables would suggest that “we are 90% through this expansion.” At the same time, this economy is “70% about the consumer,” who appears to be in a strong position from a savings perspective. “I’m very optimistic about the consumer and I hope that continues,” he said.
Turning to M&A, Grier pointed out that in certain sectors, “scale has had its advantages.” He predicted that consolidation will continue, albeit at an “episodic” rate. “This is a consolidating sector and I do believe it will continue,” he said.
Steven Buller, portfolio manager at Fidelity Investments, said he was “extremely disappointed” that there haven’t been more acquisitions in the last few years. “Many companies today trade at discounts and should go away,” he said.
Jennifer Fritzsche, managing director at Wells Fargo Securities, highlighted a “tremendous amount" of private infrastructure capital on the sidelines in the data center and tower REIT segments. She also pointed to “unique partnerships,” including joint ventures, that are also emerging in the space.
Turning to valuations, Buller noted that REITs today are being valued more on a multiple or growth-type basis, rather than on their net asset value (NAV). On average, REITs are trading at a premium to private market values—based on their ability to raise equity and accretively put that new capital to work—"which is a good thing,” he said.
Grier agreed with Buller that companies are being valued more on a multiples basis today. “I don’t think we’ll get away from NAV, I think it’s a good discipline, but I do believe we’re seeing more and more discussion around multiples.”
Part of the change in valuation methods, according to Thomas, is due to a shift in shareholder composition. “For the first time ever, the generalist active group is larger than the dedicated active group,” he said. Generalist investors are less focused on real estate benchmarks like NAV and are more interested in a company’s growth rate and multiple. “They think of REITs as equities rather than a pile of real estate,” he noted.
For her part, Fritzsche said the high growth sectors she covers have been helped by the fact that they now have shareholder bases that extend beyond dedicated REIT investors.
Elsewhere, Thomas described the debt markets as “very liquid.” He added that ratings agencies are becoming more recession-sensitive, with a greater focus on leverage. Buller described REIT leverage levels as “way too low. the pendulum has swung way too far…people aren’t viewing enough the leveragable cash flow ability of this industry.”
The panel also looked at disruptive factors at work in the real estate industry, including the shared workspace segment.
“We believe the shared workspace industry has been a big positive for the office business, and it’s here to stay,” Thomas said. Boston Properties currently has several leases with WeWork and other operators in the shared workspace segment, and has also started its own platform, FLEX by BXP.
Airbnb, meanwhile, has had an impact on the hotel sector, although hotel operators have adjusted well to this new entrant, according to Grier.
Turning to 5G, Fritzsche said the new technology is going to be “extremely transformative…I think a decade out it will have more than lived up to the hype.”
Growing investor interest in ESG matters was also highlighted by the panel. Fritzsche said the diversity angle has been of particular interest for investors lately.