A constant state of change in the commercial real estate industry has coincided with Graziano’s 20-plus years in the business, which seems fitting for someone who’s always on the move. REIT magazine coaxed him into sitting down for a few minutes to discuss some of the more notable developments that he has witnessed during his career and how REITs are capitalizing on favorable conditions in the capital markets.
REIT: You’ve been working in commercial real estate investment banking for more than 20 years. What is it about the field that has kept you engaged for two decades?
Michael Graziano: Well, for starters, it’s certainly not boring. The entrepreneurial nature of the client base is, I believe, more unique than that found in general corporate America. It is a “hands-on” business, and yes, there are still a fair number of CEOs whose names are on the doors – they care a lot.
Secondly, remember that REITs are a fairly nascent industry in the public format. It was only really “born” in substance 20 years ago and has experienced a tremendous amount of change and growth—from board composition, depth of management teams, focus of business and crispness of game plan, internal systems, financial sophistication, consolidation, and, of course, size and liquidity. Having been involved in that has been a remarkable ride, and in perhaps a corny way, I’m proud of the industry and the place it holds in the business world today.
REIT: How do you think all of those changes have affected your day-to-day work as an investment banker?
Graziano: You know, when I first started out, bankers were really just glorified brokers. There was no real public market of substance for real estate companies or securitization of finance. We basically sold individual properties and portfolios of properties and arranged financing as an agent for clients with life companies and pension funds.
That’s where I really got my education on the real estate, right down to modeling rent structures and growth, expense reimbursements, tenant improvement costs, downtime, et cetera. It has been so helpful later in life to really understand the nuts and bolts of the business. I think a lot of young people in the job today would really benefit from more of that.
Then, the great securitization of real estate began, and the job really changed. I remember my first IPO, as well as working on the first real estate debt securitization ever done, which was for a single property. It was total baking from scratch for the real estate space.
Over the years, everything got more and more streamlined, sophisticated and efficient. Now, the best bankers are part real estate guru, part corporate finance whiz, part consultant and judgment provider, and, perhaps, part therapist. In addition to providing client advice, for the past several years now, I’ve been charged with managing the overall business—real estate, lodging, gaming investment banking, mortgage finance, and all associated personnel—globally, so that has been yet another change in the job. I feel this last piece has really helped provide a better feel for the efforts put forth and challenges faced by the CEOs that we advise.
REIT: One of the more notable developments in the REIT capital markets in recent years has been the growing use of at-the-market (ATM) offerings to raise capital. All things being equal, do you view this as a positive trend?
Graziano: My overriding view is that companies should have access to as many pockets in the capital markets as possible and the ability to deploy as many tools as feasible to utilize those markets. On the equity side of the equation, there is a place for the bought deal, the overnight marketed deal, the multi-day marketed deal, the ATM, et cetera.
It really depends on the specific company situation and the nature of the markets at that moment. The most thoughtful companies, in my view, have utilized all of the above over the years.
REIT: Since the onset of the financial crisis in the latter half of the previous decade, the overwhelming story in the capital markets has been the Federal Reserve’s quantitative easing policies and adherence to low interest rates. One side effect of the Fed’s actions: capital flow into high-income investments, such as REITs. For REITs, these marginal inflows have elevated price-earnings multiples. How has this affected their cost of capital and ability to raise funds?
Graziano: Obviously it’s been of great benefit. Among other inherent attributes of REITs, the attractive yield, stability of cash flow and strong track record have all combined to make them a very compelling investment proposition in recent times. Adding low-cost finance, attractively priced equity, and total access to the markets across the full corporate finance spectrum of products has only further fueled their success.
Importantly, I think management teams have been very disciplined, though, in terms of their use. Everyone has used the opportunity to get balance sheets in order, even to the point of incurring some prepayment costs on debt coming due in the future in order to lock in long-term financing at today’s historic rates.
REIT: Given that, as you mentioned, we’ve seen so much recapitalization in the REIT marketplace, what happens next?
Graziano: With all the “defensive” work done, most folks are now in “offense” mode, searching for strategic acquisitions or mergers to grow their businesses, knowing that they can be readily financed. They have to be the right deals, though, and management teams are appropriately being very selective. We have been spending a lot of time with them thinking through these issues.