Scott Craig, portfolio manager with Eaton Vance Investment Managers, joined REIT.com for a video interview in Chicago at REITWeek 2013: NAREIT’s Investor Forum.
Craig discussed the Federal Reserve’s monetary policy and its impact on REITs and their cost of capital.
“There’s no question that Bernanke’s policies have significantly reduced the cost of capital in the commercial real estate business, including for REITs. That includes the cost of debt, the cost of preferred equity, and the cost of common equity,” he said. “Capital is very inexpensive and that has driven property values and has driven NAVs (net asset values) higher.”
He said that he’s asked REIT CEOs their opinions on the impact of rising interest rates and the answer often depended on why rates are raising.
“If interest rates are rising for primarily fundamental reasons, which mean an improving economy, then that improved economy would call for real estate cash flows to increase and property values should be okay,” Craig said.
However, on the other hand, he said that if interest rates rise for technical reasons such as an abrupt change in Fed policy that could be more problematic for real estate values as well as other asset classes.
Additionally, Craig offered his take on recent REIT merger and acquisition activity and said that he doesn’t expect a lot of activity to take place during the remainder of the year.
“I think it’s always the case in the REIT industry that the biggest barrier to M&A is the lack of a willing seller,” he said.
Craig discussed the recent merger between MAA (NYSE: MAA) and Colonial Properties Trust (NYSE: CLP) and said that it made strategic sense and that there was a partner willing to do the deal so it worked out.
“By contrast there was an apartment REIT merger that was rumored last year that didn’t happen. That potential merger had an equally good strategic rationale behind it but what was lacking was a willing seller,” he said.
Craig also said that he’s bullish on the apartment sector and expects fundamentals to be better than expected.