cut and transactions resume, we believe these long-term attributes will be more evident to the investing
community.
CROWE:
REITs should rebound before the direct
market, and many over-levered players will simply come public like we saw in the early 1990s to
either ‘recapitalize or die.’ There just won’t be enough
money to go around to fund their needs through
asset sales.
PORTFOLIO:
What subsector, region, or investment
theme represents the best opportunity in U.S. REIT
shares in the coming year and why? Where should
investors put new money to work?
TED BIGMAN:
The key investment theme that we utilize to invest is to buy stocks where the share prices
represent a meaningful discount to the underlying
value of the company’s portfolio. We have noted a
wider discrepancy in the relative discount and pre-
Through September 2008, it may have felt good to
be invested in the U.S., only because U.S. REITs were
essentially flat while real estate stocks in other parts of
the world were down.
However, in 2007, Asian real estate stocks were
the darlings and in several cases posted double-digit
gains. The fastest growing economies of the world
are outside the U.S. There are many strong real estate
companies in Asia and Europe that are trading at even
bigger discounts to NAV and at better valuations than
some U.S. companies.
BULLER:
One thing that could jump-start secu-ritization is that there appears to be slightly more
equity currently available to listed real estate stocks
in today”s capital-constrained world than in the
private world. In 2008, we saw many REIT secondary
offerings in the U.S.-REIT market to, at first, shore
up balance sheets, but which later could be used to
purchase assets.
is to buy stocks where the share pric es
The key investment theme that we utilize to invest
represent a meaningful discount to the underlying
value of the company’s portfolio.
—TED BIGMAN
mium within the U.S. REIT sector in 2008 as investors
have focused on the stability and risk of earnings
irrespective of share prices versus underlying asset values.
One enormous caveat is that one must be sure the
company has a strong enough balance sheet to endure
the current financial crisis without having to engage in
a value-destructive act to raise capital in order to repay
maturing debt.
CROWE:
The focus on balance sheets will continue to
be the right one. If REITs are really to benefit from
distress, they will need to have balance sheet capacity.
On the other hand, REITs with balance sheet issues
will probably engage in Ted’s ‘value-destructive acts,’
and we are getting a sense of how this will play out in
Australia—via large dilutive rights issues.
PORTFOLIO:
The rise of securitized international real
estate as an investment opportunity was an exciting
story that was interrupted in 2008. What do you see
happening in the year ahead?
FERGUSON:
The expansion of the public or listed
market is a long-term trend that will definitely continue over time. As for investing, this market continues
to point out the merits of taking a global approach.
Perhaps soon we could see a new REIT IPO w ave
internationally, similar to one we saw in the mid- 19 90s
in the United States. REITs would either raise eq uity
capital to buy properties at attractive pricing from dis-
distressed sellers or current property owners would b ring
their companies public as a strategy to help recapit alize
the balance sheet.
CROWE: I suspect that in time we will see a num ber
of new IPOs globally, in-line with Ritson”s “long-t erm
trend’ of REIT market expansion.
BIGMAN: We have witnessed a significant accept ance
byinvestorsofglobalrealestate,asmanyamen ded
their U.S.-only mandates to global mandates, and
we do not anticipate a reversal. Clearly, there will be
periods when U.S. may outperform global. However, as
investors have increased their overall allocations to real
estate for its attractive investment returns and lack of
meaningful correlation to other asset classes, the shift
to global, which further enhances the diversification
benefits of investing in real estate, is entirely consistent
with that basic thesis. ✦
Christopher M. Wright is a regular contributor to
Portfolio.
