Investor perspectives on REITs and the capital markets was the theme of the lunch general session at Nareit’s REITworld: 2023 annual conference held in Los Angeles on Nov 14-16.
Nareit’s 2024 Chair Matt Kelly, CEO of JBG SMITH (NYSE: JBGS) moderated the panel, which also featured: Jeff Horowitz, global head, real estate, gaming, and lodging, BofA Securities; Kerry Johnson, co-chair, U.S. real estate sector, DLA Piper LLP; Rick Romano, managing director, PGIM Real Estate; and Steve Sakwa, senior managing director and senior equity research analyst at Evercore ISI.
On the topic of REIT earnings and access to capital, Sakwa described the current environment as a “tale of two cities,” with shorter-duration assets such as apartments and self-storage feeling the impact of new supply. On the flip side, “we saw some really good growth out of the health care companies,” particularly senior housing that was “decimated during COVID.” Growth in the industrial sector looks likely to be sustained into 2024, he added. Broadly speaking, however, “the road is still pretty rocky going into next year,” according to Sakwa.
Romano noted that macro factors are driving investor sentiment, adding that next year could “look pretty good if we get some stabilization in rates.”
Horowitz, meanwhile, addressed how REITs are prepared for a higher-for-longer rate environment. “Public markets are really well-positioned,” he said, with public companies generally having five-year average debt maturity at below 4% rates. “This is a moment when REITs should ultimately be able to play offense…we’ve got to be a little bit more optimistic and a little bit more upbeat because it’s not so bad,” he said.
Elsewhere in the panel discussion:
· Johnson said the issuance of green bonds has dropped since 2021. “What we’re hearing from investors is that when you’re marketing securities you want to focus on the fundamentals—the quality of the portfolio, debt governance, the strength of the balance sheet. You don’t want to be distracted necessarily by the use of proceeds.” While green bonds are not going away, they are likely to be fewer, she said.
· On the M&A front, the “haves” from a cost of capital perspective have been buying the “have nots” at very accretive levels,” Romano said. “Looking at capital markets right now, REITs are in pretty good shape to play offense.”
· Office is “by far the most distressed, dislocated property type with probably the most uncertainty,” Sakwa said, although “work from home is fading and people are coming back to the office more regularly.” Romano added that it will take more visibility into valuations before active managers begin to stop underweighting the office sector.
· AI will fuel a wave of building in the data center space in the next three to five years that REITs can take advantage of.
· The Fed could cut rates three to four times in 2024, Sakwa predicted, which could push REITs 15-20% higher, with gains weighted to the back half of the year. Horowitz forecast a return of IPOs to the REIT market.