Article Excerpt:
TWST: I've heard for the last two or three years that the REIT story is over, and yet as I look at the charts here today, the REIT group is grossly outperforming the market again. What's going on?Mr. Anderson: Everyone is trying to predict the demise of the REIT industry, and we're now working on our seventh consecutive year of outperforming the broader market. To be truthful, the early years of the REIT outperformance were largely a function of a safe haven to protect against what had been some difficult times economically speaking. The REIT provided a safe haven with their dividend yield, and investors were attracted to that. If you fast-forward to the 2004 or 2005 time frame, the fundamentals of real estate started to pick up nicely. Job growth reentered the market, and in varying degrees, the REIT industry - depending on which property sector you looked at - started to show significant fundamental improvement 12 to 18 months ago. That has helped carry the sector toward the latter part of the outperformance. What we've seen over the past 18 to 24 months has been a lot of liquidity in the marketplace, on the order of $75 billion worth of real estate transaction. Those are public-to-public merger or public-to-private transactions, and that high degree of liquidity in the marketplace has resulted in analysts and investors resetting their NAV estimates. Increasing their NAV estimates has rescued them in the sense that it has made REIT valuations more realistic relative to how the private market is valuing real estate. So fundamentals have driven it, followed by a lot of liquidity in the marketplace that has justified valuations for the REITs, and we're on our seventh year of outperformance.
TWST: Where do we go from here? Can this continue ad infinitum?
Mr. Anderson: I think it can continue, because there's no shortage of liquidity
in the marketplace right now. We think that there will be more M&A activity. We
think there will be more go-private transactions, and we believe that will show
well relative to where stocks are currently trading. What we have noticed is
that the spread between stock prices and where the companies are being acquired
has narrowed. Once upon a time, companies were being acquired for 30%, 35%, and
40% above where their prevailing stock was trading, and that spread has declined
as investors and analysts have gotten smarter relative to the real value of
these companies. However, we think that the continuation of M&A activity in
combination with good, solid real estate fundamentals, as well as the difficulty
and expensiveness of development, should continue to carry respectable results,
at least over the next 12 months.
Tickers included in this excerpt: CSA, DRE, HCN, HR, OFC, PSB, VTR
TWST Newsletter
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.