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REIT Analyst Bullish on Sectors With Shorter Leases

11/27/2013 | By Allen Kenney

David Toti, a senior managing director with Cantor Fitzgerald, joined REIT.com for a CEO Spotlight video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Toti shared his thoughts on the prospect of higher interest rates and the impact on the REIT market.

“I think the rate issue can cut two ways,” he said. “First and foremost, it’s perceived as a negative. We initially downgraded the sector in mid-May on the concern that tapering would cause a back-up in rates and subsequent falling real estate values. With the back and forth by the [Federal Reserve] on policy and some uncertainty in the market as to the direction of tapering and the direction of rates as well, the issue of the impact on real estate valuation has been put in suspension.”

The market is showing signs that investors are anticipating that real estate asset prices could dip, according to Toti.

“The public equity markets have continued to trade sideways, indicating that a lot of investors fear real estate value contraction,” he said. “The counterargument to that is that there’s enough momentum now at the fundamental level to offset an increase in rates and a subsequent devaluation. We’ve been neutral on the space for the majority of this year, expecting valuations to remain relatively stable in that context. I do think that going forward, the number one issue for the space is really rate concern. Ultimately, if rate increases on the cost of capital rises much faster than fundamentals, we’ll see a subsequent real estate devaluation.”

Toti was asked about sectors where he is taking a bullish view.

“We’ve been consistently overweight in the short-lease sectors—apartments, self-storage, pockets of health care—anything where there’s an ability to pass on any margin pressure to the consumer in the context of pricing power,” he said. “One of the big concerns right now in the apartment sector is that pricing power is eroding, but we still view it as substantial enough to withstand a cost of capital increase, whether that’s on the operating expense side or the capital side.”