Increased Liquidity, Capital Availability, Improving Property Fundamentals Should Bring Another Strong Year for Property Investment Trusts
| Host Hotels & Resorts President and CEO Ed Walter is chair of NAREIT|
Recent data from the National Association of Real Estate Investment Trusts (NAREIT) verifies that the beat continued to go on for U.S. REITs last year, with share prices outperforming the broader equity market for the fourth straight year.
The FTSE NAREIT All REITs Index, which also includes mortgage REITs, delivered a 20.14% total return for the year, while the equity REIT index returned 19.7%. That compares to the S&P 500’s 16% gain.
With interest rates and company debt levels remaining low and commercial real estate
fundamentals and the general economy on the mend, it's a good time to be assuming chairmanship of NAREIT, one of the commercial property sector's most influential organizations. CoStar recently connected with Host Hotels & Resorts (NYSE: HST
) President and CEO Ed Walter, who began his tenure as chair at NAREIT’s REITWorld convention in San Diego in November.
Walter has led Host Hotels & Resorts (NYSE: HST
), one of the nation’s largest owners of lodging assets in North America, Latin America, Europe and the Asia Pacific, as CEO and director since 2007 and has been with the company since 1996.
The company dates back to October 1993 when Marriott split into two companies, Host Marriott Corp. and Marriott International. Host Marriott retained most of the company’s real estate assets food, beverage and merchandise outlets in airports and toll roads, while Marriott International, Inc. is a leading operators and franchisor of hotels.
Bethesda, MD-based Host Hotels, which has been actively disposing of certain properties to fund potential acquisitions of core hotel assets and further reduce debt,recently sold the 1,663-room Atlanta Marriott Marquis in downtown Atlanta to an undisclosed buyer for $293 million.
Walter has previously been active as first vice chairman and other roles within Washington, D.C.-based NAREIT.
In discussing the outlook for REITs and the association's priorities in 2013, Walter emphasized that NAREIT's main legislative focus will be participating constructively in discussions regarding tax reform and ways to resolve the nation's spending and debt issues, outlined in related CoStar news coverage this week.
NAREIT will also continue to press for reform of FIRPTA, the Foreign Investment in Real Property Tax Act, to reduce tax barriers that act as disincentives to cross-border equity investment in U.S. real estate, Walter said.
Meanwhile U.S. debt and equity capital markets for REITs are both quite attractive entering 2013, Walter said.
"Equity multiples across the different [CRE] sectors are at a good level and not stratospheric by any measure," Walter said. "The equity markets are open to good companies if the use of that equity is deemed by the market to be a good use of capital."
The public debt markets have never been better, he added.
"For companies that can access the bond markets, and most of the larger REITs are structured to use that type of capital primarily, as opposed to mortgage debt -- the debt markets are incredibly attractive right now," he said. "Over the last 12 months, those companies have been issuing debt at record low coupons and in significant volume."
While transactions like the $6.5 billion sale of Archstone by Lehman Bros. to Equity Residential (NYSE: EQR
) and AvalonBay Communities (NYSE: AVB
) will be rare, capital is available for acquisitions and "there's no reason why we shouldn't continue to see pretty good transaction activity" in 2013 following a strong fourth quarter, Walter said. At the property level, "the fundamentals for most of our businesses are very attractive."
"The interesting thing about this cycle comes back to the fact that as much as we'd all love to see stronger growth, one of the benefits and silver linings of the slower recovery is it may lead to a much more extended recovery," he said. "While we'd all love to see a couple of 3.5% to 4% GDP growth years -- certainly in lodging, I'd love to see the impact that would have on our business -- the reality of a slower recovery also means that we'll tend to see less new development and new supply."
With demand rising and new supply levels in almost every CRE sector below long-term averages, owners and investors can be fairly optimistic about rental growth opportunities in a particular market, a strong dynamic for REITs.
Responding to some Wall Street analysts who have claimed that REITs are becoming richly priced at a time when CRE bargains are harder to find as demand increases, Walter said he looks at it quite differently, noting that the MSCI US REIT Index remains 25% below its all-time high and average capitalization rate spreads between both Treasuries and the bonds index are significantly wider than average.
"There's plenty of opportunity in real estate and plenty of opportunity in REITs. Admittedly, cap rates are lower, and part of the reason for that is we have both an optimistic outlook on growth and an abundance of capital," he said. "When you look at CRE pricing compared to alternate investments, there's a pretty healthy premium."
Regarding the lukewarm reception to most public offerings to form new REITs, Walter expects to see more muted activity in 2013.
"I've talked with a few investment bankers and this is definitely not a market where you show up with a few properties and a bright idea and try to launch a company," he said. "At this part of the maturation process of our industry, there are already a variety of great companies with a variety of investment approaches and perspective.
"To bring a new company to market, there needs to be a compelling story. We will still see IPOs, but the feedback I've been getting is that it will be more muted than what we've seen in previous cycles."
In the lodging sector, Hilton Corp. is still expected to return to the publicly traded space. A more likely scenario will be a continuing migration of private CRE assets into the public space through mergers and acquisitions.
"There's probably a bit of a cost of capital advantage for the public market versus the private market. Deals probably won't be the size of [Archstone with EQR and AVB], but there are a lot of opportunity funds that are getting near the end of their lives, and they need to find ways of providing liquidity to their investors."
Likewise, Walter does not expect a huge volume of public-to-public REIT M&A activity due to cultural and social issues within the companies and as significantly, the issue of whether the acquirer is willing to pay a premium price.
"In deals that can be strategic it will happen, but history would suggest that there's not going to be a lot of volume there."