LOS ANGELES -- A year and a half of declining stock prices have taken their toll on the mood at the
National Association of Real Estate Investment Trusts
meeting in suburban Century City.
An in-the-red pall hangs over the REIT executives, analysts and investment bankers attending the annual event, which normally amounts to a pep rally for the public real estate industry. But some real estate types insist the doldrums are merely an unavoidable, if uncomfortable, stage in the young industry's maturation. Comments at Wednesday's session of
REIT Roundtable highlighted those feelings.
This reporter sat down with six real estate investors and analysts to talk REITs. Participants in this edition of the Roundtable include: Ritson Ferguson, president of
CRA Real Estate Securities
; Jim Grissett of the
, an Atlanta-based real estate investment company; Marc Halle of
Prudential Real Estate Investors
; Richard Paoli, REIT analyst for
Warburg Dillon Read
; Craig Silvers, director of research for
Sutro & Co.
, a Los Angeles investment banking firm; and Carl Tash of
, a real estate investment management firm in Los Angeles.
REIT Growing Pains
"People forget this is a very young industry," said Prudential's Halle. "REITs are really only five years old and during that short history, stocks soared for more than three-quarters of it."
He has a point. Before the current swoon began in 1998, REITs provided investors with a total annual return near 20% in 1996 and 1997. That's not bad for an asset class in which the primary goals are solid cash flow, in the form of dividends, and price stability. "Historically over 80% of the return from public real estate has been dividend income," said Grissett.
Still, investors were shell-shocked when REIT stock prices began to plummet last year. That, the panel agreed, is the result of unreasonable expectations from investors. "Real estate is a solid long-term investment," said CRA's Ferguson. "But too many of today's investors forget about time horizon and patience."
In a world where time horizon is judged in minutes, not months, and "risk-adjusted returns" is a phrase found more often in history books than finance texts, could the future of this young industry be in doubt?
Members of the Roundtable seem to think not, although expectations will have to change before a meaningful rebound can be sustained. "If an investor can buy today with a three-year time horizon, REITs will prove a good fit," said Halle. "I'm just not sure that type of patient mindset is very prevalent in today's investor."
Providing a Cheap Defense
Members of the Roundtable also suggest that REITs, in general, provide a relatively inexpensive defense in a less resilient broader market. "REITs are now trading at about a 15% discount to their net asset values," said Ferguson. "If rates back up, there is a lot more volatility in the general equity markets than there will be in the real estate markets."
That said, most members of the panel agree that REITs became overvalued at their peak in 1997, and a return to NAV premiums of near 30% isn't likely. Rather, REITs will likely be valued in a tight range around their net asset value. Ferguson thinks somewhere between a 5% discount and a 10%-15% premium is a reasonable range.
That, Tash argues, may be a bit optimistic. "REITs and real estate companies have typically traded at a discount to their NAV," he said. "It looks like the market is trying to move back in that direction, holding REITs to a discount of the underlying property values."
Even then, most members of the panel say REITs provide a good, steady, fairly priced alternative to a relative expensive general market. "REITs could drop lower from tax-loss selling and supply pressures from unit investment trusts," said Silvers. "But, over the next three years you get an 8% dividend and good earnings growth. For the average investor, those are numbers you can be happy with."
Coming next, the Roundtable takes a closer look at share buybacks, management-led buyouts, and picks and pans in the coming year.
It appears as if the slump in stock prices is beginning to take its toll on the analyst community. People close to the situation say Eric Hemel, the influential
analyst whose bullish call just days before his firm launched a $1 billion unit investment trust with
Cohen & Steers
ironically signaled the top of the market, is looking at other sector opportunities within the firm. "He is staying at Merrill but moving to a technology-related analytical post," said one person close to Hemel. Hemel couldn't be reached for comment.
Steve Hash, former head of REIT research at
, has been promoted to head of U.S. research for the firm. Christopher Marinac, director of REIT research at
, has become the director of banking research at the Atlanta-based investment banking firm.
Several other firms are contemplating reducing their coverage of REITs or assigning current REIT analysts to other departments because of a lack of revenue generation from research. According to data from
, the average trading volume of REIT shares is down almost 60% in the past 12 months.