For all the election season bickering over the pace of the economic recovery during the last four years, this year’s gathering of REIT executives was a decidedly happier and more agreeable place than in 2008 when the REIT industry trade show last met in San Diego.
Back then, attendees were agonizing over whether real estate investment trusts could even survive, let alone thrive, amid the frozen credit flows, plunging stock prices and near collapse of financial markets at the height of the Great Recession.
By contrast, the 1,100 participants at this year’s bi-annual industry gathering at the Hyatt Manchester Hotel -- their ranks thinned somewhat by registrants' need to stay home and guide their companies' emergency response to Hurricane Sandy on the East Coast - were buzzing excitedly about market conditions that appear to be almost the polar opposite of those they faced in 2008.
REITs had raised $54 billion in funds through the first three quarters of 2012, eclipsing last year’s record of $51 billion. Lenders are falling over each other to make deals, and capital has not only thawed, it’s flowing in torrents in the low-interest rate environment.
Rather than the huge leveraged buyouts of real estate trusts by private equity firms that marked the late 2000s, private companies are cautiously looking at going public to tap into the access to unsecured debt enjoyed by public REITs.
"Four years ago, we were pulling people out of the [San Diego] harbor; we didn't know where the world was going," said Michael Graziano, managing director, Goldman Sachs & Co. "The faucets were completely shut off for the capital markets. The faucets could not be more open right now."
Graziano was a panelist on the capital markets update session on day 1 of REITWorld this week, joined by other mavens of Wall Street REIT analysis, including Michael Bilerman, managing director and head of real estate and lodging research, Citi; Jeffrey Horowitz, global head of real estate, gaming and lodging, Bank of America Merrill Lynch; and Edward Walter, the incoming chairman of NAREIT and president and CEO of Host Hotels & Resorts, Inc.
"In 2008, investors were saying ‘how worse can the cost of capital get,’ and this year, it's ‘how much better can the cost of capital get? It's a bizarro world compared to four years ago," said Bilerman.
The panel spent considerable time on the propsect of REIT initial public offerings (IPOs) which have received a lukewarm response from investors in recent years despite the consistent uptick in REIT share prices, and the slow pace of mergers and acquisitions activity in general.
The consensus: any new REITs will need to offer something new and different in order to stand out in an already crowded public market where most property subsectors have at least seven or eight large REITs competing for investment dollars.
"Everyone's has been saying for a couple years now, ‘where is the great IPO boom?’" said Horowitz. "We're not going to see a period of time like 1994 to 1997, when 20 or 30 REITs went public each year.
"We're a much more mature industry now. For companies to go public, they have to be much more differentiated, they have to be particularly strong or capable, and there has to be something special about them that make sense for the investor."
That said, the market is likely to see an increase in REIT IPOs next year, led by such high-profile registrations as Archstone and persistent speculation over whteher Hilton Worldwide will take the REIT plunge.
"I do think 2013 will be a little stronger than we've seen in the recent past," Horowitz said. "There are companies in the single-family housing space, companies that are new to our marketplace, and they’re going to tend to go public."
Moreover, formerly publicly traded companies that went private in the 2005-07 boom years are facing financing coming due, maturing funds or facing issues in their assets pools, Horowitz said. While those companies have so far refinanced debt or kicked the can down the road, they’re starting to look with fresh eyes at the idea of returning to the public markets.
However, as the panelists acknowIedged, it’s not like real estate companies have been shy about attempting public offerings. The larger issue is that investor response to new REITs has mostly been underwhelming.
"There's a lot of money out there to successfully fund IPOs, but they have to be the right companies," Graziano said. "It's a really bad idea to come to market when your hook is it will be relatively cheaper. That's not a great IPO story."
Real estate investors so far have preferred firms that come into the public domain through existing companies rather than as new entrants. Of the IPOs launched over the last decade, "there haven’t been a lot of success stories," Graziano said. "They've encountered more difficulties and that's why we haven't seen a ton of them."
Regarding M&A activity, conversations are beginning to pick up, but few of them involve difficult-to-execute acquisitions or joining of two public companies. Most involve private firms joining with public REITs, and a few public-to-private transactions.
"It’s essentially two words in M&A: fit and math," Graziano said. "The math has gotten a lot easier, but you can't make up [a good] fit. There's no reason for companies to buy others in their sector just because they can afford them, that's a really bad idea 95% of the time."
Smaller companies that aren't among those "haves" or want to attain size, scope and scale are talking a lot more than they were two or three years ago.
"But my prediction would be slow, steady consolidation in the space that takes place over time, and I don't think you'll see a lot of branching out," Graziano said. While mall REITs have made inroads in the outlet center business, the REIT space is littered with mistakes where a company felt it could bolt on another line of business onto their core operations, he said.
In fact, at well over 100 companies, many investors believe the REIT universe probably ought to be thinned out a bit, Bilerman said. Conversely, investors the largest companies, and the top 10 REITs today make up nearly half of the NAREIT index, up 10 percentage points from a decade ago.
"The big only got bigger so there’s some level of investor angst that too much of the industry is in too few hands, that you'd almost want some of these smaller or mid-cap companies to get together, which are probably the most difficult deals to consummate," Bilerman said. "The private companies coming into the public domain is really what investors want to see."