Sullivan, interviewed during REITWise 2013: NAREIT’s Law, Accounting & Finance Conference, added that the companies benefitting from this rally have typically been smaller companies that generally own higher cap rate properties and maintain higher leverage than the average REIT.
“One theory for why this is happening is that we have an entire investor universe that is searching for yield and it has found that yield in some of these smaller REITs that have higher dividend payouts,” Sullivan said. He added that another theory is that generalist investors got into REITs through blue chip names and have been selling them as they have been searching for other opportunities.
As far as mergers and acquisitions activity in the REIT space, Sullivan said there are two important questions: what should happen and what will happen.
As for what should happen, he said there are currently too many smaller REITs in the industry and consolidation would be advantageous particularly as it comes to spreading G&A costs across a larger portfolio of assets.
What will happen, Sullivan said, is that there will likely be a lot of market speculation regarding possible deals but very little actual transaction activity. The exception, he said, lies in the public, non-listed REIT space.
“In the non-traded REIT world you have a lot of activity right now promoting M&A,” he said. “This is an industry that is going through a very rapid evolution.”
The REIT approach to real estate investment continues to be applied to a wider array of property types and new REITs have been met with mixed reactions by investors, Sullivan said.
Sullivan advised investors to not just dismiss a company because it focuses on a property sector outside of what has traditional been considered within the REIT space. He pointed to health care REIT HCP Inc. (NYSE: HCP) as an example of a company that was launched amidst some investor speculation and has evolved since 1985 into one of the 10 largest U.S. REITs and a true blue-chip of the REIT industry.
“Some of these companies may follow a path that is analogous,” Sullivan said.