Four Quick Questions...
…with Jack Foster
by Allen Kenney
1Are there any specific economic indicators to keep a
particularly close eye on regarding signs the REIT market
may be on an upswing?
What started as a “crisis of confidence” in debt securities has
become a deep and broad recession. The lack of available credit
and sharp decline in consumer
spending has driven the decline
in business activity. The return
of consumer confidence will
first indicate an upswing in the
REIT market. Mortgage applicants, home sales and spending
will indicate demand for commercial property.
Unfortunately, the first indicator will offer false hope as it
will be followed by accelerating
Jack Foster
is managing
director and
head of global
real estate
at Franklin
Templeton
Real Estate
Advisors.
inflation. However, inflation will
suggest a return to commodity and finished good demand.
Longer term, REITs and commercial property will adapt well
in an inflationary environment;
in the short term, the inflationary impact will be negative.
2A number of REITs have
taken advantage of the
recent ruling granting greater
flexibility in issuing stock dividends in lieu of cash. Is this a
positive or negative trend?
This option for REIT managers is clearly positive as it allows
companies to build balance
sheet strength in the current financing environment. For some
companies it will prove critical
to maintain a stable balance
sheet; for others it will offer the
opportunity to build a war chest.
However, while equity issuance was accepted during the
“accretive acquisition” days of
the mid-1990s, investors may
be less enthusiastic about the
dilution implications of stock
issuance as we move out of this
crisis. It is important that this
exception be temporary.
3The short-term impact of
the economic downturn
on REITs can be seen in the
market correction that has
occurred in the last year.
However, do you foresee any
longer-term effects on the
industry as a result of the current financial upheaval?
Probably the most significant
will be a return to the “accretive
acquisition” opportunities of the
mid-1990s. REI Ts now offer
investors and lenders the most
transparent and stable structures
for the ownership of property.
It is likely that REITs will be
aggressive in acquisitions at the
bottom of this cycle, utilizing
their very competitive cost of
capital as they did in the 1990s
for substantial acquisitions.
4What qualities should
investors look for in REIT
management teams during
this economic crisis?
We now have a great opportunity to observe management
teams and their strategies
through a full cycle (1990s
through to now). Investors will
seek those managers whose vision and actions were consistent
and prudent.
A number of companies in
which we invest have demonstrated the ability to keep a
focus on the fundamentals of
property management, avoiding
the lure of risky financing tools
and investment strategies. We
like managers that stay focused
on what they do best and avoid
distractions. Of course, high insider ownership is a dead giveaway that the manager is careful
and focused. F
