Nareit’s new chair Sandeep Mathrani moderated the opening lunch session at Nareit’s REITworld: 2018 Annual Conference. Mathrani, CEO of Brookfield Properties Retail and vice chairman of Brookfield Properties, was joined on stage by representatives from Goldman Sachs, LaSalle Investment Management, Evercore ISI, and Brixmor Property Group Inc. (NYSE: BRX) to discuss the outlook on capital markets.
Mathrani asked the panel why the value and pricing of REIT securities has been lagging the S&P 500 in recent years, even though for most asset classes, earnings and dividends have increased.
“There’s always a question in our space about publicly-traded REITs … and whether they trade like real estate or they trade like stocks,” said Michael Graziano, managing director at Goldman Sachs. “My view is long-term they trade like real estate, but short-term they trade like stocks.”
Graziano said REIT securities don’t only trade on the fundamentals of their business but also on how attractive they appear to be in the form of stocks, vis-à-vis other alternative uses of capital. Over the past few years as the “world’s gotten back into growth mode,” Graziano said the safety and security of REIT securities still exists, but has become less interesting to people.
Lisa Kaufman, managing director at LaSalle, agreed with Graziano that the recent dip in investor interest in REITs is a reflection of risk appetite, adding that the rate of growth has also been declining. On the other hand, in the broader equity markets on the heels of tax reform, there was a big increase in earnings growth expectations.
“When we look at how real estate securities are priced versus equities, we kind of see fair value there, despite the underperformance,” Kaufman said.
In the very short-term, REITs react to interest rates, said Sheila McGrath, senior managing director at Evercore. “In the longer term, I think if the economy’s growing and landlords have pricing power, [then] I think that REITs can outperform,” McGrath said.
“We as an industry need to do a better job of bringing in other forms of capital with investments,” said Jim Taylor, CEO and president of Brixmor. “The disconnect that exists today between the fundamental value of the assets that we own and where we trade is about as wide as it’s ever been.”
Graziano assured the audience though that the market has not peaked. “We’re [just] in a world where it offers more modest growth … but that could change,” he said.
Investors should make a long-term allocation to real estate, Kaufman added, since it is a distinct asset class and a good diversifier. Real estate securities are a very practical way to invest in real estate today, she said.
“Nobody knows how long the cycle is going to be—nobody in this room, nobody on this panel. So really the only protection you have from your cloudy crystal ball is diversification,” Kaufman said.