Andrew Richard, Managing Director, Credit Suisse
How will current REIT valuations affect their activity in the capital markets?I think that real estate valuations in the U.S. are pricing to forecasts of strong underlying economic growth and are reflective of the desire overall for yield-oriented investment. Therefore, the underlying real estate is priced very aggressively right now. I think the stock exchange-listed Equity REIT market is a little more conservative than that, and most of the sectors are currently trading at, or at a slight discount to, their underlying net asset value.
What that means for capital market activity is that it will still be healthy, but it may moderate relative to the last couple of years unless the REIT valuations start to price in more of this growth and are priced more favorably relative to the underlying asset value.
How willing do you think institutional lenders are to extend debt to REITs in this environment?Very. I think REITs have an excellent, even a spotless, track record relative to underlying credit performance. In the world of lending, borrowers have been separated into the have-lots and have-nots, and REITs are clearly in the have-lots category. Whether that’s at the corporate level—with their unsecured credit facilities—whether it’s in the unsecured debt market, or whether it’s in the secured commercial mortgage-backed securities (CMBS) or bank loan markets, there is plentiful debt capital available to REITs.
I would probably say that for REITs, this is the most favorable borrowing environment that I’ve ever seen in the industry. The flip side of it is that acquisition volume has been light and REITs have grown to be very disciplined, very conservative around capital structures. I don’t know if that necessarily means that you’re going to see a lot of borrowing. It just means it’s available to them.
The single-family REIT market is an emerging area of interest, with a spate of recent IPOs. What is the outlook for investor interest in this sector?There is a core base of institutional investors who are very interested in the sector, public and private. I think that there are a lot of public market investors who are still taking a wait-and-see approach to how the business model matures over time. We do believe that the model works and that there will be a number of very high-quality players who will emerge as leaders in the space; most will in some way, shape, or form find their way to the public markets.
I think that what’s holding the sector back is that investors don’t have enough data to have as much confidence in the underlying assets as they do for a lot of the other real estate sectors.
Public, non-listed REITs have been actively raising capital and making acquisitions. Do you expect this to continue?
I think you’re seeing a lot of capital flowing into the non-traded REITs. It’s through different channels than the institutionally oriented REITs, but it’s still real and it’s still happening. It’s definitely something that the (stock exchange-listed REIT) sectors are going to have to see more of and address. There’s no question.
Any sector that has lower operational intensity and higher current yields will be prominent, and the obvious ones would be net lease and health care. There is competition for assets (with stock exchange-listed REITs), and ultimately as these public, non-listed REITs find their way into the public market—whether it’s through listings or through IPOs—they are going to be competing for capital with them over time.