Recently, Armada ETF Advisors attended the NYU Schack REIT Symposium where multiple REIT CEOs and industry participants spoke on a variety of panels and topics such as interest rates, cap rates and the current lending environment.
Speaking on these topics, VICI Properties noted that they continue to focus on transition from offense to defence (and back again) by having “ability to anticipate.” They noted that it takes time to formulate new insights and think about how real estate influences “live, work, & play.” At the same panel, Kimco Realty (KIM) highlighted that supply and demand is in the landlord’s favour right now. “Potential distress and opportunities are on the horizon,” they said. “Collect your nuts for winter.”
Executives spent time highlighting their balance sheet management in the wake of rising interest rates, as well as the current cap-rate environment. “How do you assess cap-rates if nothing trades?” was a common question throughout the symposium.
The credit rating of each company depends on the ability to raise capital. Many executives noted that the fixed income market is opening back up while the equity market is basically closed on account of the discounts to NAV where stocks are trading. Each company takes a different approach to its NAV and highlighted why they think their various companies are trading at discounts.
Throughout the symposium, several executives noted the importance of boards focusing on leverage deploying capital; for example, AvalonBay discussed how they must be prepared for a wider set of outcomes and take steps to enforce the strength of their balance sheet. In turn, Empire State Realty Trust discussed their capital allocation strategy as an operating runway for creating an all-weather balance sheet. They addressed the dividend cut during COVID, with the aim to bring it back at a smaller level while waiting for Observatory to fully recover.
At the investor-panel roundtable, investors are betting on growth in a rising interest rate environment through residential and industrial sectors. They note bank failures mean that balance sheets across the board are in focus. They are seeing select opportunities in multiple sectors including industrial, residential, shopping centres, and lodging. This is alongside secular growth tailwinds benefiting storage, towers, and single-family rentals.
Green Street mentioned that the office is not attractive in the private markets, while public market asset values are down 50%. It’s important to be choosy – the Sunbelt may be the most appealing based on value or return – but the key is to focus on the total return potential and look at the cash flow generation of the business.
On public vs private valuations, Citi discussed how public markets have shown cap-rates moving up. However, there is a wide bid, and as more debt is due, more deals go through. Green Street noted that real rates have moved 200-300 basis points in the past 15 months with no changes in asset value growth. The public markets have factored in a 25% decline in asset values, and it should lead to a repricing in the private markets which should lead the publicly traded REITs being more active in the marketplace over the next 6-12 months.
Executives spent time in the next panel looking at how the cloud and digital infrastructure is transforming the REIT industry. AI was a constant topic throughout the day. During the panel, JP Morgan noted that “the cloud” is growing at a 20% compounded annual growth rate and it makes sense that five of the largest 10 REITs are in the digital infrastructure space since the outlook for the sector is positive and multiple companies are reporting record leasing. They do note that land, power supply and labour are challenges in the sector. Fifth Wall noted that “the line between tech and real estate is getting blurry.” In addition, “tech is the connective tissue that makes companies like Invitation Homes work.” As far as the impact of AI, the executives noted that AI wouldn’t disrupt a hotel ballroom as physical buildings don’t generate structure data, but we need the physical space “to do civilization and the economy.”
“COVID reinforced bricks & mortar retail” said Michael Bilerman as he cites the store drives volume in local markets. Deliver optionality to the consumer that they want. “Bring as much to the consumer as possible in which the real estate surrounding it provides for.” The main goal is to drive NOI, but the deal has to stand on its own and he commented on how Tanger has evolved its properties with more experiential concepts for the entire family.
Seritage highlighted how they look at the best use for each big box of space they have. They are seeing residential interest in some of its parcels. In addition, they note that some of their secondary markets are “booming.”
Blackstone noted that they have done their best investing during times of volatility. They commented that fundamental in their core sectors remain the strongest that they have ever seen. They also noted that the sectors with which they have the long-term convictions continues to remain the same as they ask where is the secular long-term growth?
The key takeaway is that every single member of these management teams is focusing on where the puck is going. How can we be opportunistic in this economic climate by adding shareholder value? How can we continue to improve our balance sheet strength so that we can be opportunistic should the right deal come along? What do we need to do to stave off activist investors? How do we continue to focus on long-term value creation?
These are questions that all REIT investors want their management teams to focus on.
