Salient to Investors:
Property purchases by U.S. REITs are likely to be curtailed as a tumble in share prices makes a key source of capital costlier.
Jim Sullivan at Green Street Advisors said for most property types, we have hit the pause button and expect REIT executives to be very careful with respect to new acquisitions.
Purchases completed by US REITs through June 27 were double the year-earlier period.
A Green Street index of prices has recovered all of its losses from the real estate collapse and as of May was 4 percent higher than the previous peak in August 2007.
REITs attraction as an investment alternative with higher and steady returns is disappearing with rising interest rates, and their dependence on the equity and debt markets to raise money for acquisitions makes them vulnerable to jumps in interest rates.
Craig Guttenplan at CreditSights said REITs will be reluctant to take on debt as a replacement for stock sales because they won’t want to boost leverage and make themselves even less attractive to investors, whereas asset sales would be a better source of new capital.
Single-tenant and health-care REITs have been attractive to investors because of the stable cash flows offered by the long duration of their tenants’ leases, making them comparable to bonds, but since the slide in REIT shares began, the two sectors have been hit harder than other types of landlords.
Paul Adornato at BMO Capital Markets said the REITs will sit on the sidelines and it will take time for the dust to settle to see where they stand relative to the broader market and what the implications are for the cost of capital.
Sam Lieber at Alpine Woods Capital Investors said health-care and single-tenant REITs historically have grown through acquisitions to boost dividends and since their return is the spread between the cost of raising capital and the yield from property purchases, share-price declines and rising interest rates tend to increase the cost of capital, reducing returns. Lieber said they don’t offer a lot of growth.
Single-tenant and health-care REITs have less flexibility to raise rents because of their lease lengths, making other REIT types more attractive to investors. Paul Curbo at Invesco Ltd favors apartment, industrial and regional-mall properties because they have a greater ability to raise rents and grow internally.
Raymond Torto at CBRE Group says demand from investors across the commercial real estate industry remains strong and doesn’t see sellers changing their prices because there are 10 guys in line with the cash.
Sheila McGrath and Nathan Crossett of Evercore Partners say rising interest rates would be the result of an improving economy, which would benefit REIT shares, and says the recent selloff is a buying opportunity.
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