David Auerbach of Esposito Securities Shares His Notes from the Street

REIT magazine: September/October 2014

For those in the know in the real estate investment business, David Auerbach’s daily market commentary has become indispensable reading for many institutions. It hits subscribers’ e-mail inboxes around 8:15 a.m. EST every day after Auerbach, a REIT trader with Esposito Securities, spends two to three hours putting his thoughts together.

“I’ve had many people tell me that they think it’s the best REIT note on the Street based on the comprehensive level of information. It’s that brand recognition that we strive for,” he says.

REIT magazine recently interviewed Auerbach to gain his latest insights on the REIT market.

REIT: Can you give us an idea about what you think makes your firm’s approach to REIT investment different?

David Auerbach: What’s different about my firm is that we are a non-research-driven broker-dealer. We offer complimentary services that an investor would expect from a broker-dealer, but what is great from where I sit is that I can utilize my contacts on both the buy side and sell side and then formulate my opinions and thoughts. We tend to bounce ideas off a lot of different people in the industry to see if our suggestions have merit, so we feel like we aren’t wasting people’s time on information they might not find useful.

REIT: How did your background influence your decision to become a REIT trader?

Auerbach: I’ve been lucky to chat with a lot of interesting investors. When I first started as a trader, I had no idea what a REIT was or why I should care. After learning from some of the best analysts and traders on Wall Street, I realized how important it is to have REITs in your portfolio as a means for diversification.

I learned the importance of managing the balance sheet. In addition, I learned what it means to have a high-quality management team. Based on this knowledge, I have been able to form my own opinions that institutional clients value.

I’ve always been taught how important it is to foster relationships in this business. Whether a customer is an up-and-coming hedge fund or one of the largest institutional investors in the country, everyone deserves the same attention to detail and level of service. You never know when a new customer will become a big industry player.

REIT: Are you looking for any more mergers and acquisitions in any particular sectors in the near future?

Auerbach: Of course. I think the REIT industry is ripe for more M&A activity. With so many new companies entering the space or deciding to operate as REITs, it opens up a new world of potential acquisitions.

Look at the net-lease REITs as an example where we have seen a run of acquisitions in the past two years. In addition, there have been a lot of sale-leaseback transactions involving restaurants, gas stations and other properties.

I wouldn’t be surprised if we see some kind of activity in the lodging space. There are a number of dominant players with a variety of properties, and I can see them taking a look at some of the smaller players.

REIT: If we asked your average client for an opinion on the benefits of REIT investment, what would the response be?

Auerbach: Most of the people I talk to are on the hunt for yield. I chat with a lot of REIT preferred investors, and they are always looking for better yields.

If you go back a couple of years ago, many stock exchange-listed REITs had preferred shares with coupon rates between 7 percent and 9 percent. Now, you may see those kinds of yields, but on the higher-levered names. If I can put a 6 percent coupon in front of someone today, they will actively take a look at the investment idea.

Lots of people question as to how they can preserve capital. I always mention the dividend strength of REITs versus other industries, and that gets them pretty excited. 

REIT: What would you consider to be the biggest misperception about REITs among the investing public?

Auerbach: That these are just for my grandparents, or that they only own office and apartment buildings.

Who could have imagined that we would see an explosion of data center REITs, tower companies, student housing, billboard advertising, et cetera? With so many different types of companies out there and more companies exploring the possibility of operating as REITs, the investing pool has grown dramatically.

Based on the size of market share and the number of REITs that are a part of the S&P indexes, the industry seems to be booming.

REIT: Mortgage REITs have seen some volatility since the financial crisis. Give us an idea of the sentiment among investors about them now.

Auerbach: When I first started out in the business, clients would hang up the phone immediately if I mentioned Mortgage REITs. Today, I have clients that want me to show them my Mortgage REIT flow. What was once considered to be “out of favor” is now considered to be an attractive investment. 

However, I do wonder what will happen if we experience another downturn or slowdown in the commercial mortgage-backed securities (CMBS) space.

REIT: Experience retail and “showrooming” have become popular topics when discussing mall and shopping center REITs. How do you see these trends impacting the retail sector?

Auerbach: Showrooming scares me when it comes to mall and retail REITs. I’ve spent a lot of time thinking about how these companies are going to adapt as more commerce is traded online. I think about what has happened at Best Buy, which has lost market share to Amazon.com and eBay.

I think if you have an Apple Store on your property, you may weather the storm for the time being. That being said, why do I need to go check out the stores when I can do most of that online?  I think this is a topic that will be closely followed for the next 10 years. Unfortunately, I think we will see another event along the lines of the closures of Circuit City, Borders, and Barnes and Noble down the road.

As a result, the mall and retail REITs always need to be thinking about their tenant make-up and trying to figure out how to backfill space in case they lose another one of their anchor tenants.

REIT: How has REIT trading changed since you started your career?

Auerbach: REIT trading is a completely different business than when I started out. Originally, 90 percent of the trading occurred on the NYSE with the balance occurring over the counter or on one of the regional exchanges. We had a much smaller universe of names to trade with trading increments of an eighth of a point.

Today, the floor business has slowly gone away, with most of the trading occurring “upstairs.” Algorithm-based trading dominates the marketplace. Instead of having between 8 and 16 price points, we now have 100. Hence, the trading has gotten much more difficult, and it’s harder to put crosses together as some parties will not budge over a penny or two.

Whereas one used to call the floor to give orders and get reports back, written down on order pads, after several minutes, now trading occurs instantaneously. If I had to predict where we will be 10 years from now, I strongly believe that less trading will occur on the floors of any exchange.  A greater volume will continue to be moved upstairs. I’m hopeful that we eventually go to nickel price increments on highly illiquid stocks. 

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