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REITs Need To Focus On Low Leverage and High Transparency for Future Success

After Golden Era, Real Estate Trusts Facing New Environment of Higher Interest Rates, Expected Inflation
November 14, 2013
While in many respects the last two decades can be viewed as a "golden era" for real estate investment trusts, having grown from a total market capitalization of $32 billion in 1993 into a market force on Wall Street with a market capitalization of $675 billion and counting currently, changing conditions in the financial markets are expected to bring new challenges. Specifically, REITs that fail to adhere to good corporate governance, adopt simple and clear investment structures and keep leverage at bay may find they aren't around for very long in the next decade.

Low inflation and interest rates that characterized much of the previous 20 years won’t be the story going forward.

"The next 10 years won’t look like the last 10 years," noted Robert Steers, chairman/CEO of Cohen & Steers. "There will be a huge gap between the winners and the losers. Stick with what you’re good at, and use less leverage."

That was the shared consensus among a panel of senior REIT executives that kicked off the National Association of Real Estate Investment Trusts (NAREIT) REITWorld convention. More than 1,200 industry professionals are attending the four-day conference at the Marriott Marquis in downtown San Francisco.

Joining Steers on the panel were Mike Kirby, chairman/director-research at Green Street Advisors; Ron Havner, Jr., chairman/CEO of Public Storage; Martin "Hap" Stein, Jr., chairman/CEO of Regency Centers Corp.; and Richard Campo, chairman/CEO for Camden Property Trust.

By almost any measure, the REIT industry today is huge. Properties and mortgages owed by REITs comprise more than 15% of total commercial real estate valuation. REITs help support 1 million jobs, and more than 300 mutual funds and ETFs have dedicated investments in REITs.

However, in retrospect, even these visonaries did not foresee how big an impact the REIT structure would have on real estate.

"To me it was intuitively obvious that being public would provide the mechanism to build what I thought at the time would be a regional shopping center owner," said Regency Centers' Stein. "I had no idea we would come up with an offering of $100 million. That was a lot of scotch and wine at the time," he said, drawing smiles from the audience. "Today, we’re a $7 billion national company."

If there is a 'secret sauce' to success as a REIT panelists said it's keeping the story simple and easy to understand for investors -- and reducing leverage.

"It’s not rocket science," noted Green Street's Kirby. "The story for REITs has always looked good, and today it looks even better. CEOs have learned a lot, it all boils down to being excellent in operations and execution."

Richard Campo, chairman and CEO of Camden Property Trust, one of the handful of firms that went public in 1993, said that just over one-quarter of the REITs that went public in those years have made it to their 20th anniversary. Of course, several have merged or been acquired by private equity investors.

Still, REITs have the potential for significant future growth, with company stocks potentially evolving into investment targets for 401K retirement plans and large worldwide flows of capital flows moving into trusts, the panelists offered.

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