Steven Marks, managing director with Fitch Ratings, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.
Marks has been monitoring REITs’ stock buybacks in the second half of the year, and he noted that activity has been limited. He attributed the lack of buybacks to the performance of REIT stocks in 2014, as most are trading at prices about their net asset values (NAV).
“Thus, [the stocks] are less economic from a buyback standpoint; they’re not as accretive,” Marks said.
Additionally, Marks pointed out that the industry in general appears locked in on credit ratings. According to Marks, when companies are selling assets, they’re buying new assets or directing that capital into development projects.
Regarding credit ratings, Marks said the push this year by REITs to achieve investment-grade credit ratings relates to the flexibility offered by unsecured capital. Furthermore, Marks observed that companies are emphasizing low leverage, which encourages them to pursue investment-grade ratings once they have cut their leverage down.
“Lower-levered companies are valued more highly,” Marks said. “They typically trade at higher multiples. They typically trade at higher NAV premiums than some of their peers that may not be rated. To the extent that companies understand that dynamic, it’s also one of the reasons that we haven’t seen a lot of buybacks. There’s definitely an interplay between buybacks, low leverage and NAV premiums.”
Looking ahead to 2015, Marks offered his assessment of the key stories heading into the new year. First, he said, interest rates will command the attention of observers. Additionally, Marks cited property fundamentals as a key theme for the upcoming year.
“Occupancies have been increasing fairly steadily across almost all asset classes the last three or four years,” Marks said. “Does that result in more development?”