Today, public companies are flush with cash, thanks to robust capital raising and plentiful access to debt. They've become formidable players on the acquisitions market and are now behind some of the biggest transactions taking place. The industry itself is becoming broader and more diversified as well, with both traded and non-traded REITs attracting capital and IPOs being launched for more non-traditional assets.

In an effort to take a look into the business of running a REIT within this changing and dynamic market, Real Estate Forum brought together the heads of well-known public companies from the major food groups of the commercial real estate industry. These five individuals discussed not only the changes in the REIT market and their strategies, but also their prospects for the CRE market as a whole. An edited version of that conversation follows.

PARTICIPANTS

Monty J. Bennett
Chairman & CEO
Ashford Hospitality Trust Inc.
Dallas

Jack A. Cuneo
Founder, President, CEO and Trustee
Chambers Street Properties
Princeton, NJ

James R. Heistand
President & CEO
Parkway Properties
Orlando

David B. Henry
Vice Chairman, President & CEO
Kimco Realty Corp.
New Hyde Park, NY

Ella Shaw Neyland
President
Steadfast Income REIT
Irvine, CA

MODERATOR
Sule Aygoren
Editor-in-Chief
Real Estate Forum
New York City

SULE AYGOREN: Revised figures from the US Commerce Department showed that the economy actually contracted in the first quarter. Was this surprising?

ELLA SHAW NEYLAND: When you have an economy that's slowly grinding out after the great recession, there's always fits and starts, so clearly there are always restatements of employment numbers, and the GDP getting downward to negative 1% in Q1. You move forward a little bit, you move back a little bit, but the net result is forward movement. There's cautious optimism that the economy is improving. People now have a higher degree of confidence to spend money at the consumer level and at the investor level to start making investments and decisions on a longer-term horizon.

JACK A. CUNEO: I agree; there are always pockets of growth and contraction. We do have a certain amount of fragility in the economy that would make it sensitive to things like a bad winter. But all in all, we see positive trends. We see tenants expanding and a lot of other things that indicate there's strength coming back.

DAVID B. HENRY: Weather did play a large factor in this and I don't think it indicates the economy's slipping back. Most of the retailers we talked to are cautiously optimistic about the second quarter and that sales and spending will rebound. The retailers also haven't cut back their expansion plans, which is good for us landlords.

MONTY J. BENNETT: The decrease in GDP during the first quarter was due to the tough winter as well as some natural variability that usually occurs with GDP growth. We're going through a period of de-leveraging, which means that growth is generally fairly low. In the hospitality sector, however, we saw strong demand growth for hotel rooms in the first quarter. Hotel demand growth usually correlates pretty well with GDP growth, except recently we've had demand growth substantially exceed GDP growth. And it looks like the strong demand growth is going to continue.

JAMES R. HEISTAND: I would echo that statement. From an office fundamental standpoint, without a doubt, we probably have seen the strongest demand than we've had in some time. Before, it had been pretty spotty across particular submarkets. Primarily Texas and Phoenix were doing very well whereas places like Charlotte, Atlanta and Florida were not, but we've seen an increase in demand across all the markets this past quarter. We feel pretty positive as to where we are right now.

AYGOREN: Not too long ago, stock prices underperformed in the wake of Fed's announcement that it would be ending its bond-buying program. But interest rates are still low and eventually stocks bounced back. Are you concerned that fear could cause another mass exodus, or did investors learn their lesson?

BENNETT: It's very hard to say. Interest rates and REIT stock prices are positively correlated. What happened last year was an exception to the norm. If and when interest rates rise, I think it'll be very slow considering how much debt our economy has. Any interest rate increase will have a very powerful destimulating effect on the economy, so it'll be hard to raise them very much. Hence, it's hard to say how the public markets will react. Will they react like last year, negatively? Or will they follow the historical trend of reacting positively to rate increases?

HEISTAND: If you go back to the peak, rates were considerably higher than where they are right now. Generally you would expect that if rates are rising, it's because the economy is accelerating. We're hopeful that growth continues, but I don't think it's going to be at an accelerated pace than what it's been. That's good for us who own assets, since a faster pace of growth would mean more construction and we haven't seen much of that.

CUNEO: We've actually been seeing more activity and more positive news on the REIT front in recent days than a few weeks ago. A lot of what we see in the market is just absolutely crazy. There's really no logic to it. Somebody decides REITs are good, tech stocks are bad, or that we should be out of fixed income and be more into growth stocks. Whoever makes those calls influences a lot of institutional investors that start moving stocks around, and then others follow suit.

NEYLAND: There's sort of a built-in bias, and I spend a lot of time trying to talk about why that doesn't make sense. Have they learned? That, we'll find out, but clearly they didn't last year, especially in the multifamily sector. Apartment REIT stocks in particular took a nosedive; they were trading at a 10% to 20% discount. They're starting to rebound, but I think people sometimes lose sight of the real estate fundamentals that support REIT stocks. They are not bonds.

AYGOREN: Most investors nowadays are underwriting to net asset value versus pro forma values. What's your strategy? On a broader level, are real estate assets currently priced correctly, given REIT stock prices vs. NAV?

HENRY: Most dedicated REIT investors are NAV focused and have been for a long time. NAV, obviously, is a function of the cap rates they use to cap the net operating income of the assets involved. So it's a game of creating value by growing the bottom line of property, and I would suspect most REIT management teams are totally focused on trying to create value by growing the bottom line through redevelopment, higher rents or increasing occupancy. Now, it's fair to say that while cap rates are approaching historic lows, what some people miss is that NOIs still haven't returned to peak levels because rents fell.

BENNETT: Unequivocally, private market NAVs are substantially higher than the public market, at least in hotels. We saw that very recently, with American Realty Capital Hospitality Trust's $2-billion acquisition of Equity Inns from a private fund of Goldman Sachs. They paid a price that would stretch the delta even more because it was such a strong, aggressive price. There's no question that there's a material difference in the hospitality sector between private and public market values.

HEISTAND: I agree that private asset values have increased at a greater rate than the REIT values. You're seeing capital not only going into high-quality core assets, but also into value-add plays and debt vehicles.

AYGOREN: Despite the issues, REITs have been doing very well for several months, with equity steadily rising. What has been your experience and what can we expect for the rest of this year and into next?

NEYLAND: In the non-listed space, we have really grown significantly in the past 10 years. We have total REITs in our space that are close to $100 billion and in terms of capital raised, I've seen projections this year of about $20 billion. I think retail investors are really beginning to understand and reach out to their investment advisors to invest in these non-listed REITs.

CUNEO: Since we've listed, we haven't raised any new capital. We've had no need to tap into the capital markets. We see a pretty healthy investor market and it's going to continue that way. There's good demand for both equity and debt—it's an attractive buy for investors.

HENRY: Beginning last May with the Fed's tapering comments, the generalists—the broad-based mutual funds—have actually gotten out of REIT stocks. So while dedicated REIT funds continue to be the primary shareholders, we haven't seen a lot of evidence that broad-based stock investors are plowing back into REITs.

HEISTAND: I don't have that crystal ball, but we've seen a high level of investor demand for our shares recently. I think the market is prepared to give companies who know how to invest the capital they need. I don't see any kind of slowdown as the year goes on.

BENNETT: Everything in the US economy points toward a strong equity market and strong ability to raise equity. The only question mark is everything that's going on around the world. There's constant talk about China moving one way or the other, and there are often worries about Japan and Europe. Absent some hard shock from outside the system, the US is poised to continue to do well and I expect equity flows and equity issuance to be strong.

AYGOREN: What about your acquisition and disposition activity over the past year? Would you say you were net buyers, sellers or in between?

NEYLAND: We closed the raise on our first REIT in December of last year, but for the 18-month period basically ending in December 2013, we were buyers. We bought about $1.5 billion of communities, with $1 billion in 2013 alone. We were one of the largest acquirers of apartments in the space. We did it the old-fashioned way, basically one at a time. Our acquisition team was busy.

CUNEO: In 2013, we acquired about $350 million and sold about $100 million. We're being a bit more cautious on acquisitions as we go through 2014.

HENRY: In general, we've been a net buyer, but most of our acquisitions have been through buying out the institutional partners in some of our joint ventures. We've been writing pretty substantial checks doing that. But we've also been actively selling over the past couple of years, because it's a wonderful time to sell properties, especially properties in secondary locations or of lesser quality. It's fair to say most REITs have narrowed their focus into what I would call primary markets. In our case, it's all about Florida, Texas, Metro New York, the Mid-Atlantic, California, Denver, Seattle and Portland.

HEISTAND: Parkway is a very different company than it was. When I merged my company, Eola Capital, with Parkway a little less than three years ago, it was very highly leveraged, with poor assets in poor markets. We were quick about selling off those assets and turning to much more high-quality assets in specific submarkets within the Sunbelt that have been outperforming the national averages in job growth. We've more than doubled our share price in the past two years and had three equity raises in the past 18 months, all very successful. In the past two years, we've sold off $1 billion in assets, but we've bought $3 billion, so this year we'll definitely be a net buyer.

BENNETT: We've got to watch our stock price and make sure that the balance is correct. In other words, that whatever value we're giving out by issuing shares is more than offset by the value we're going to create by buying assets. If that relationship holds up, then we would like to be a net buyer.

AYGOREN: We've seen a few M&As involving REITs, but given the amount of capital in the market, are you surprised we haven't seen more?

NEYLAND: Most of the activity has really been limited to Nick Schorsch's acquisitions through American Realty Capital. The CommonWealth deal got a lot of attention because it was a hostile bid, which is almost unheard of in the REIT space. We've also had M&A activity in the traded apartment space recently—Mid-America Apartment Communities and Colonial Property Trust merged, and Essex Properties and BRE merged. Archstone was going to do a listing and then ended up splitting its portfolio between EQR and AvalonBay. It would be interesting to see if there will be more mergers since the market has really large traded apartment REITs and then some smaller ones.

HENRY: In the REIT world M&A activity is difficult, and hostile M&A activity doesn't really work. You're talking about paying premium prices and well-shopped deals and paying both sides' investment bankers, legal fees, accounting and so forth. So it's a little bit hard to make the numbers work. And if most REITs are trying to improve the quality of their assets and upgrade their portfolio, buying a smaller REIT that's full of assets you're going to have to sell—that makes it problematic as well.

BENNETT: In our sector, I'm surprised I haven't seen more, even though it's picked up. Debt is the grease to help M&As and it has certainly become more available for hotel projects and hotel financing. For the first time players in the industry are seeing that the capital is available and, therefore, it's possible we'll see more.

AYGOREN: What about IPOs?

BENNETT: I've heard about a couple in the lodging space that are brewing. So unless there's some other type of transaction beforehand and the assets are sold instead of going public, I think we'll see a couple of IPOs in the next year.

HEISTAND: It's generally more difficult to do an IPO today than it used to be in the REIT space. There's a very full vetting process and pricing is more challenging. Having said that, I think there will be some. I think you'll see some of the nontraded REITs list and become public in order to create a liquidity event for their investors.

AYGOREN: On a broader level, there's been a lot of spinoffs done by REITs lately. Vornado plans to spin off its shopping centers, Simon had Washington Prime Group and Ashford now has a spinoff, Ashford Prime. Monty, what's the strategy behind that?

BENNETT: When we went public 10 years ago, our strategy was to invest in different types of hotel assets in different parts of the capital structure, whether it be lending or buying or leasing hotels in different parts of the country. Our returns over that period have been something like 22% compared to our peer average of half of that, so it's been very successful from an economic standpoint. At the same time, however, we still hear from a cadre of investors, especially the dedicated REIT investors, that they just don't like this structure—they want platforms that are more focused and less leveraged than Ashford Trust, 30% versus 50-60%. They wanted specificity of asset type, and they've voted with their feet.

We have had very few dedicated REIT investors in the Ashford Trust platform. We thought that spinning out this platform, Ashford Prime, and making it conservatively capitalized and focused only on high-end assets, would attract those dedicated REIT investors. With the two platforms, Trust and Prime, high-end assets go into one, all other types of assets go into the other, yet Ashford Trust keeps its core mission and we have more flexibility when we go out and look at portfolios to buy. The investors can decide what part of our business they want to invest in, instead of us deciding for them.

HENRY: It's certainly something we, along with most REITs, have considered as we look to dispose of secondary assets and secondary markets. In our case, we've decided that simply selling the assets on the open market has been the best way to create value for our shareholders. But certainly, it's a strategy that lots of REITs have used.

CUNEO: Some of that is also driven by Wall Street in that institutional investors really like to have it be a pure play. They might say, for instance, we're interested in you being a retail company, not a retail and multifamily company.

AYGOREN: Let's say someone hands you a scepter and says you're the ruler of Capitol Hill for a day. What's the one piece of legislation that you write, pass or put into law?

NEYLAND: For Steadfast, I'd like to see some sort of solution to the GSE issues. There is nothing more important to a person's well-being than their home, whether they own it or rent it, so I think having some kind of financing that's attractive to that industry is critical. The GSEs are a critical part of the apartment industry's access to capital and in providing capital to a struggling single-family home industry.

CUNEO: This whole issue of terrorism insurance is extremely important. Also, allowing people with student debt to refinance it at market rates would be a boost to the whole economy. It's a drag for a lot of people and they should be able to replace that debt at a better rate.

HENRY: Being in the retail business, we'd want Main Street Fairness, legislation that would require e-commerce retailers to collect sales tax, to be passed tomorrow. Right now the Internet-based retailers have an enormous advantage because they're not collecting sales tax, unlike brick-and-mortar stores and our tenants have to collect sales tax from customers.

BENNETT: I'd focus on immigration—having legislation that brings undocumented people out of the shadows and allows them to work here legally would be a big benefit to us.

HEISTAND: There are so many different things, from immigration to the debt problem to Social Security, that it's difficult to choose one. I believe the businesses that we deal with would like some certainty, so long-term solutions to these problems, rather than short-term fixes, are necessary. We need to have some true reform across several fronts and it's got to be something that businesses can count on as they make long-term decisions, especially capital decisions.

AYGOREN: Where do all of you see the future? What are the opportunities and what will be the winning strategies?

HENRY: For us, it's focusing on our core portfolio and basically concentrating on those 15 or so markets I mentioned earlier. We're focusing on some of our larger properties in terms of redevelopment opportunities and we're also opportunistically buying out institutional joint venture partners at attractive prices. What puts the wind at our backs in the shopping center business is there has been very little new supply. When you have population increases of 2.5 million to three million people a year and a growing economy, coupled with a 37-year low in new construction, it makes for good things in our industry. That's why our rents are going up and our occupancy is increasing.

NEYLAND: There are no indications that we're going to enter a super-charged recovery, but jobs are coming back, and at a faster pace in some locations versus others. As an example, over the past 13 months, 100,000 people moved from California to Texas. Think about why: they get out of school, they can't find a job in California and can't afford to live there, so they move to Texas. Texas is regulatory friendly and there's no state income tax, so businesses are moving there, which is going to drive demand. There's a reason 43% of our portfolio is in Texas markets. Thirty percent of the jobs in the past 10 years have been created in Texas. So if you think about what's driving the economy, our plan of buying in those high-job growth markets at those price points makes sense.

In addition, you've had the Millennials come out of school and move back in with their parents because they couldn't find a job—we call that the futon generation. Household formation normally is about a million per year, but during the Great Recession it got as low as 400,000, so there's a couple million people waiting for the economy to continue its recovery and create jobs. Over the next two to seven years, there's going to be outsized demand from this pent-up population of households. Thinking about what's driving your business and demand is the key to a successful business plan.

CUNEO: Over the past five or six years we saw this consolidation by companies to larger, more centralized, state-of-the-art industrial facilities. That trend has kind of run its course, and now, some of the smaller assets that are closer to major markets are the next area of opportunity. We've been successful in markets like the Carolinas, particularly in South Carolina, where BMW just increased its manufacturing operations. There's a lot of talk about e-commerce and high-tech logistics, but a number of our tenants do things like supply components like seats for BMW, and they're very successful. We have the same tenants in Europe doing the same thing for Mercedes Benz so we're kind of high-tech/low-tech in some ways. There really isn't any one single market or area we're focusing on. There are a lot of opportunities.

BENNETT: We're just going to continue with our plan. We're in the process of spinning out an asset manager, Ashford Inc., and listing that as a public company. So our greatest area of growth in creating value for our shareholders is to complete that spinout and then start executing on our plan for what will be three platforms: the asset manager from Ashford Inc. and the two property platforms, Ashford Trust and Ashford Prime. I think it's going to be a great year.

HEISTAND: By now we've articulated the markets in which we want to operate, and have been able to get into them. Our goal is twofold—continue to aggregate scale in the markets in which we've already invested and, obviously, to lease up and push rents in the portfolio we already own. We should be able to achieve both of those going forward, despite the economy.