07/16/2009 | By Allen Kenney
Steve Carroll, managing director of CBRE Global Real Estate Securities LLC, recently sat down with REIT.com to discuss the trend towards re-equitization in the commercial real estate industry, as well as the potential for REITs to capitalize on coming opportunities.
REIT.com: How would you characterize the competitive position of REITs in the current market for commercial real estate?
Steve Carroll: REITs are going to be in a position not unlike the early 1990s. Many of the REITs at that time were formed and listed by real estate owners and developers who wanted to solve their balance sheet problems and embark on a buying spree in order to take advantage of the significant volume of attractively valued, high-quality assets on the market. I think we're entering a similar phase, and it could be even more pronounced. It's going to be exciting to see how things play out in the next few years.
REIT.com: Do you think we'll see more of the re-equitization process taking hold among REITs?
SC: It's not just a domestic phenomenon, but one we'll see continue to evolve abroad as well. Thus far this year, we've seen a lot of activity in the U.S., U.K., Australia, and Singapore and we expect greater velocity and volume in Continental Europe reasonably soon. As operating fundamentals' continue to deteriorate and as the financial credit squeeze continues, many Continental European property companies are going to have no choice but to recapitalize via the public market in order to get their balance sheets in healthy shape. It's different in Asia, where many real estate owners have used less leverage and the greater availability of reasonably priced debt is providing more financial lubrication.
Overall, I don't think we're even halfway through the global equity raising that will take place near term. However, a whole host of property companies will wait until it's too late and are likely to be left out. Some are in denial. In other cases, they're not as interesting a candidate to the institutional buyers of shares being offered who have plenty of property securities investments—new offerings in particular—to choose from.
REIT.com: Any potential for initial public offerings from companies hoping to take advantage of opportunities created by distressed selling?
SC: We've seen some recent IPO activity globally, but nothing dramatic. The key question is: Why participate in an IPO unless the risk adjusted returns offered are dramatically more attractive than buying the shares of existing companies who have been around the block? These are time-tested companies who have a track record in the public arena without the risk premium associated with an IPO.
REIT.com: What kind of lessons should REITs and their shareholders take away from this financial crisis?
SC: For REITs, there will be further consolidation in the industry, but also a greater level of discipline for the companies. That means going back to basics in terms of what their core business really is. In other words, they need to get back to the basics of real estate ownership and asset management with a keen focus on paying out stable dividends to shareholders.
I think the financial crisis has been a wake-up call for investors who have watched these companies grow at abnormal levels because they decided to move away from some of the key attributes of REITs as investment vehicles. REITs should focus on modest leverage and recurring income through property ownership, rather than revenue streams driven by ancillary business activities. Quite frankly, I'm surprised there hasn't been a greater backlash by shareholders in relation to a number of REIT management teams' aggressive approach to leverage, particularly related to funds management activities, in recent years.
Going forward, I think that investors are going to see that while REITs may be a bit sleepier in terms of growth, the risk-return attributes are going to be more attractive, because there will be much more certainty about the dividend, and the entry point at which investors can begin to build a position in REITs will be far more attractive than it has been in years.