Jim Sullivan, managing director of REIT research for Green Street Advisors, joined REIT.com for a video interview at REITWorld 2013: NAREIT’s Annual Convention for All Things REIT at the San Francisco Marriott Marquis.
Sullivan discussed the importance of public-private market arbitrage when it comes to commercial real estate investment.
“Public REITs sit right at the crossroads of two markets – the public equity market and the private real estate market,” he said. “Usually, those two markets move down the same path, but once in a while, they diverge. It’s when values in the public equity market differ from the private real estate market that REITs can take advantage of an arbitrage.”
Sullivan talked about why share repurchases make more sense for REITs than public companies in other industries.
“There are a lot of studies that show that share repurchases have a mixed reputation or a mixed result in corporate America,” he said. “The reason for that is that many companies use share repurchases as an earnings management tool. They’re not buying their stock back because it’s cheap, they’re buying it back because: number one, they have the cash to do it; and number two, it helps their earnings per share. The problem with that strategy is most companies only buy back stock when they’re doing well, they have the cash to buy back stock and typically their stock is trading at a premium at that point. For REITs, we have this concept of net asset value that’s a terrific barometer for telling you where your stock is trading relative to the intrinsic value of your company. REIT management teams have the opportunity to look at net asset value, look at where their share price is trading and to buy stock back only when it’s cheap, not for the purpose of managing their earnings.”
Sullivan discussed hurdles that REITs have to deal with in repurchases.
“The biggest hurdle has to do with timing,” he said. “If a company wanted to buy back stock, they could go on the stock market this afternoon and buy back shares. But if the proceeds they are going to use to buy those shares are the result of an asset sale, it takes months to sell a piece of real estate.”
Sullivan also shared advice he would give to REIT management teams: “Have a view on your net asset value and use it as an important barometer when you’re thinking about buying back shares.”