Chilton Capital Fund Manager Says REITs Should be Trading at Higher Premiums to NAV

Matt Werner, portfolio manager and analyst at Chilton Capital Management, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.

Given the outperformance of the REIT market compared with broader market indices in 2014, Werner commented on REIT valuation levels.

“Any time the market goes up by almost 30 percent, you’re going to have questions about valuation,” Werner said.

He noted that dividend yield spreads between REITs and the Treasury 10-year note are in line with historical averages, as are implied capitalization rate spreads. Adjusted funds from operations (AFFO) multiples are above historical averages, he said. “However, the properties are a lot better today than they were when those averages were created,” Werner said.

He added that Chilton’s investment outlook focuses on net asset value (NAV).  “REITs are trading just in line with their NAV today, and given the low risk with these companies, I think there should be much higher premiums to NAV,” Werner observed.

In terms of buying opportunities, Werner said possibilities exist in the mall sector because properties are trading at discounts to NAV despite good growth. The lodging sector also offers buying opportunities, Werner added.

Werner was asked about the prevalence among REITs toward simplifying their business models and whether that trend will persist into 2015.

“I hope so,” responded Werner, highlighting moves by Simon Property Group, Inc. (NYSE: SPG) and Vornado Realty Trust (NYSE: VNO) to spin off segments of their portfolios.

“They have been leaders in the industry for a long time, and, hopefully, others will follow. It also creates more opportunities for mergers and acquisitions, which would be another driver of multiple growth,” Werner said.

Meanwhile, Werner responded to the naming of Houston, Chilton’s home base, as the most attractive real estate investment and development opportunity of any major U.S. market, according to a survey from PwC and the Urban Land Institute (ULI).

Werner said the recognition for Houston highlights the strong job growth in tertiary markets, “which is where the REITs really should be.”