NEW YORK CITY-All REITs are not created equal was the main message conveyed by the illustrious speakers on the REIT Power Panel, part of the RealShare Net Lease conference—organized by the ALM Real Estate Media Group—held Tuesday at the Convene conference center in midtown Manhattan. Nearly 300 industry professionals were in attendance.
But at least one CRE veteran in the group, Benjamin Butcher, CEO, president and chairman of the board, STAG Industrial, noted the wisdom of keeping these investments for a while rather than rushing to sell. “These assets are meant to be bought and held as cash flow,” he said.
Industry pioneer Richard Ader, founder and managing director, U.S. Realty Advisors, LLC, speaking more generally on the net lease market, advised the audience to hold onto investments of all types as a standard operating procedure. “Over my career, I've realized it's good to hold assets, things happen if you own,” he said.
The CRE veterans who discussed REITs spoke of public instruments versus private, investing in high-credit companies or assuming more risk, debt and other financing and a host of other strategies. But no matter the approach, REITs are ideal for net lease properties, according to Butcher.“REITs have a cost-of-capital advantage, and that's going to be durable and prolonged,” he said. “The cost of capital is going to do down; even non-traded fee loads will go down.”
Added Benjamin Harris, CFA, Gramercy Capital Corp., “If you look at the net lease asset class within the public space, it's undervalued. Only since the credit crisis that people have accepted net lease for the institutional sector.” Net lease isn't a good fit for private capital anyway, noted Paul McDowell, manager, CapLease, “Our sector doesn't work well with private equity because investors there look for 20% return and net lease doesn't bring that in.”
But according to Nicholas Schorsch, chairman of the board and CEO, American Financial Realty Trust, yield is what matters most. “Five or seven years ago, no one cared, but now the institutional market does because retail investors do. The retail investor is starved for yield and there's no yield in other asset classes.”
In terms of buying strategy, these investors all take different approaches. Said Schorsch, “We look to not have too much exposure to any one credit so we look for diversification nationwide by tenant and industry." But Butcher revealed, “We find the most fertile source is Class A space in secondary markets. Those properties tend to be underpriced in terms of value.” Added Gregg Seibert, SVP, Spirit Realty Capital, “We buy all cash and put leverage on [the assets] later.”
Taking a longer-term view, Ader shared his view on a number of trends. Following talk all day of the record low levels of cap rates, and how that's helping the market, Ader injected a dose of reality. “I think a decline in cap rates is always risky, cause then what's next?” he asked. “How do you get out of something you're in? What does a deal look like at a 7 or 8 cap rate going out?”
In terms of mergers and acquisitions, Ader said, “I think consolidation is in the future of this industry. There are some big private REITs and some good public ones, as well as portfolios out there that are attractive to this industry.”
The deals will take both the shape of recent transactions as well as some other forms, he noted. “I think they'll be friendlier (referring to ARCP/Cole Credit Property Trust III debacle), but they'll be both friendly and unfriendly m&a.”
Recent times have shown the industry veteran some unusual activity, said Ader, and he offered up his take on it. “What's surprised us in past 6 months is how aggressive buyers are,” he said. “They were driving cap rates down to 6s, but where's the other end of the market? If you're overpaying for an asset, it makes it more difficult to exit with clarity.”
Ader also shared what keeps him up at night.
“What concerns me most is the uncertainty of the world markets,” he said. “If there really is a slow down and losses start happening, we could have a bad situation. The only thing that'll burst this bubble—if we're in one—is a dramatic change in the economy.
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Rayna Katz
Rayna Katz is a seasoned business journalist whose extensive experience includes coverage of the lodging sector, travel and the culinary space. She was most recently content director for a business-to-business publisher, overseeing four publications. While at Meeting News, a travel trade publication, she received a Best Reporting award for a story on meeting cancellations in New Orleans during Hurricane Katrina.
