12/17/2013 | by
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REITs Should Avoid Levering Up, Analyst Warns

Dirk Aulabaugh, senior director with Green Street Advisors Consulting Practice, joined REIT.com for a video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.

Aulabaugh was asked about the biggest challenge facing REIT management teams in 2014. He noted that executives should resist the temptation of “going out and levering up to continue to buy assets.” He added that management teams “that don’t take that bait are the ones that are going to win in the eyes of the investors.”

With many REIT stocks currently trading at a discount, Aulabaugh also advocated  that management teams sell assets and buy stock back, which would be “accretive to the shareholders and create real value.”

Meanwhile, Aulabaugh predicted that the multifamily sector, where stocks have been trading at a discount to net asset value for about a year, is “particularly interesting” at this time. If job growth continues, he said, “multifamily has the potential to outperform in terms of net operating income (NOI) growth.”

When asked to pick the defining story for the REIT industry in the past year, Aulabaugh responded that it would have to be the move by the Internal Revenue Service (IRS) to take a closer look at companies considering the election of REIT status.

Aulabaugh explained that Green Street Advisors has been working with some of these companies, and that the IRS announcement essentially halted all of these decisions, at least temporarily. He noted that around six companies, representing nearly 10 percent of the REIT industry equity market capitalization, were impacted. 

“I think that was a defining moment because what it means is that we may see none of those companies come to the REIT space or we may see all six. It’s such a polarizing topic in the REIT world that we just find it incredibly interesting to see what will happen, and I think the reality will be somewhere between zero and six,” Aulabaugh said.