PORTFOLIO:
What carryover will the financial crisis
of 2008 have on REITs in 2009?
SCOTT CROWE:
Cap rates have to rise, potentially
back to 2004 levels. The listed market, which is six
to 12 months ahead of the direct, has priced this in
and then some, trading at a 20 percent discount to
NAV. Capital will continue to be scarce, and non-bank
sources such as mortgage-backed securities (CMBS)
may be closed for some time.
REITs will need to be realistic and aggressive in
locking away liquidity needs. Most have been responsible with their balance sheets this cycle, and a lot of
the over-leverage sits in the direct market. The global
r ecession and its impact on net operating income
( NOI) increasingly will be a focus. Attractive dividend
yields and cash flow supported by quality leases leave
R EITs relatively well-positioned.
R ITSON FERGUSON: I agree with Scott that the prin-
c ipal issue so far has beendetermining the implications
and capital markets and a slowdown in fundamentals.
Credit and capital markets are hurting twofold, making it difficult to access debt financing at a reasonable
price and expanding the capitalization rate.
Given the economic slowdown, occupancy rates will
decline, pressuring rental rates. Obviously, shorter-lease sectors such as lodging and apartments will
experience the first impact. In their current valuations,
we see many U.S. REITs already expecting a significant
property price decline and fundamental deterioration,
especially within the shorter-lease property prices.
CROWE:
Whilst REIT prices have already factored in
falling property values, we haven’t seen the full effects
of that yet in direct markets. The process by which that
will occur should be distressed selling by the highly
leveraged buyers of 2006 into 2007.
HOGAN:
I am also concerned about shorter-duration
leases, although I do think asset values in apartments
might actually hold up better than in other sectors,
new IPOs globally, in-line with the
I suspect that in time we will see a number of
‘long-term trend’ of REIT market expansion.
—SCOTT CROWE —SCOTT CROWE
of the “Great De-Leveraging” on cap rates and values.
The issue coming increasingly into focus is, “what will
be the impact of a deeper and longer economic
contraction on real estate fundamentals and cash flows?”
I f real estate cash flows hold up through 2009, then
we”ve probably overshot on this price correction. If not,
t hen maybe the bounce-back will be muted. In either
event, it”s pretty clear that there is a wide gap between
public and private valuations for real estate that favor
t he listed market at this point for a better
risk-r eturn ratio.
M ARY HOGAN: It’s the well positioned REITs who
will do the best in 2009. With many sources of lending
curtailed, weaker fundamentals and looming maturities, poorly capitalized REITs may not survive. There
will be fewer REITs in 2009 than there were in 2008.
PORTFOLIO:
What will happen to U.S. commercial
real estate property values and fundamentals over the
next 12 months, and how will it affect your investment
recommendations?
STEVE BULLER:
After already declining an estimated
20 percent to 25 percent, property prices are expected
to fall further in 2009, pressured by difficult credit
because financing alternatives are still available for the
multifamily sector.
Fundamentals are one thin g, but investor sentiment is quite another. What will drive U.S.
REIT share prices in 2009 and why?
PORTFOLIO:
We expect REIT shares to rebound faster
than property values. As the current cycle progresses,
we expect REITs to be likely buyers of assets over the
next several years. Commercial real estate assets financed aggressively in 2006 and early 2007 are bound
to come to the market for sale. REITs will once again
be acquiring assets at attractive and accretive levels—a
phenomenon not seen since the 1990s.
HOGAN:
Select REITs should see external earnings growth
opportunities improve. Additionally, companies with
the most secure dividends may outperform. Moreover,
we expect to see another consolidation wave among the
public companies, this time public companies acquiring other companies in stock-for-stock transactions.
We continue to believe in the long-term characteristics
of REIT stocks: stable earnings, high dividend yields,
good balance sheets and great disclosure. As the dust
settles, property valuations are revisited, dividends are
PHOTOGRAPHS OF TED BIGMAN AND S TEVE BULLER BY ROBERT BENSON/AURORA PHOTOS; SCOTT CROWE, MAR Y HOGAN PREUSSE AND RITSON FERGUSON B Y JOHN EMERSON
