The REIT industry looks poised to be the beneficiary of the continuing economic recovery, with capital markets playing a constructive role in supporting that growth going forward, a general session on the first day of REITweek: 2021 Investor Conference concluded.
Moderated by Nareit 2021 Chair Jim Risoleo, president and CEO of Host Hotels & Resorts, Inc. (Nasdaq: HST), the panel included: Laurel Durkay, head of global listed real assets at Morgan Stanley; Michael Graziano, managing director at Goldman Sachs & Co.; Cedrik Lachance, director of global REIT research at Green Street; and, Haendel St. Juste, managing director at Mizuho Securities USA.
“With the great re-opening underway, REITs are an ever-more compelling investment story,” Risoleo said.
Graziano noted that with respect to REITs, “it’s a very financeable world that we live in right now,” a trend that is proving to be a “constructive force” for mergers and acquisitions (M&A). St. Juste added that banks and insurance companies are “eager to lend.”
On the topic of inflation, panelists said they see the recent run up in prices to be transitional in nature. “There’s a general hope that this sorts itself out over a period of time,” Graziano said. Durkay, meanwhile, described the spike in inflation as “rational” given the boost to economic growth, and said she expects inflation to trend slightly higher in coming years. St. Juste noted that REITs offer investors an inflation hedge, in part because they can pass on a lot of cost increases onto their tenants.
As for REIT valuations, Lachance described the sector as priced on the “cheaper side of fair,” with more potential in store for valuations to rise. Durkay noted that from a net asset value (NAV) perspective, REITs are trading at a 5% premium to underlying asset values, however she noted that the figure doesn’t take into account their growth potential. Graziano added that the lack of private market trades has hampered the ability to get accurate public market valuations. “We’re feeling our way through valuations,” he said.
Turning to M&A, St. Juste described the environment for public to public and public to private transactions as “very favorable.” Durkay said she expects to see more go-private transactions, but said there are strategic reasons why public to public deals make sense.
For his part, Risoleo said three recent public to public deals in the hotel sector were not particularly well received. Looking ahead, he said that if transactions do occur in the hotel sector they are more likely to be public to private ones. He added that there is a lot of capital chasing “very attractive” individual assets in the hotel space, a trend that is likely to continue.
Meanwhile, on ESG matters, Durkay said the bottom line is to consider the risks and opportunities of ESG and how a company is able to deal with them. St. Juste, meanwhile, pointed to an increase of diversity in the REIT industry but said there is still progress to be made, as some corporate boards still look like “the family portrait.”