Improving Fundamentals For Commercial REITs - An Exclusive Interview With Mr. Alexander Goldfarb Of Sandler ONeill And Partners
August 24, 2011 - The Wall Street Transcript has just published REITs Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Alexander D. Goldfarb is a Managing Director and the Senior REIT Analyst in the research department of Sandler O'Neill + Partners, L.P. He joined the firm in 2009 after two years as a Director and Senior REIT Analyst at UBS AG and five years at Lehman Brothers Holdings Inc., where he was a Vice President and REIT Analyst. Mr. Goldfarb holds an MBA from the F.W. Olin Graduate School of Business at Babson College and a B.A. from Wheaton College.
TWST: Please start with a snapshot of your coverage universe.
Mr. Goldfarb: Collectively at Sandler O'Neill we have 27 REITs under coverage. I cover 23 and my colleague, James Milam, has launched on the health care space, and he covers four. We cover across apartments, student housing, shopping centers, malls, office, industrial and health care, and we continue to grow the platform.
TWST: In your view, what are the most and least favorable property types or geographic markets or niches right now?
Mr. Goldfarb: Let's first say that, one, we still have a 3% Treasury, and two, you have a positive spread between the cost of buying real estate and financing it. As long as those two things remain in place, commercial real estate is going to continue to do very well. To that, the economy is still growing. Obviously the pace of growth has slowed, and as you and I have spoken about before, there is very little incentive for businesses to hire given the level of uncertainty that has come out of Washington. I mean, well before the budget debate, there was just so much regulation coming out and so much uncertainty of what it meant that businesses, not surprisingly, scaled back the hiring. But you definitely have the haves and have-nots. People who survived the Great Recession have returned. They're renting apartments.
They're shopping at the mall. They're leasing office space. They are leasing some warehouse space, and they are going back to college. So you have that level of demand continuing. You don't have any new supply that is going to change - and apartments are certainly on the forefront of the supply wave - but right now there is no new supply. Real estate is a finite asset, and as supply gets eaten up, the incremental price that people are willing to pay for what's remaining goes up exponentially. That is what we're enjoying right now - the lack of supply has more than offset the lack of job growth. Clearly, if you get a double dip, another recession, major job losses, that's obviously bad. But in the current environment, if this sustains, real estate will continue to do well because of those three metrics: slowly recovering economy, no new supply, and a low Treasury and a positive spread between acquisition and financing costs. To your question, our preferred sectors are apartments, student housing, malls and New York office.
TWST: What are your top investment picks right now?
Mr. Goldfarb: Our top pick for the year is EQR (EQR). We have a fair number of "buys," but some other key picks that I'll highlight would be American Campus (ACC) in student housing, Simon (SPG), DDR (DDR), SL Green (SLG), and I am happy to throw out another apartment, Essex (ESS). As I said, we have more "buy" names, but that's probably enough for this discussion.
TWST: You mentioned earlier that it was a surprise that industrial space seems to be stronger than anticipated. Would you talk a bit more about what you're seeing, and is this an area investors should be looking at now in terms of value?
Mr. Goldfarb: The tenant activity is picking up. Just two months ago at the NAREIT conference, we met with the companies that we cover, and it was still pretty much a lukewarm environment. But that's changed in the past two months. People are out looking to take space. It's still a renter's market with rents still below the peak. But landlords are improving occupancy, and as you start to tighten the market, that starts to give the landlords more pricing power, so suddenly they're no longer willing to just offer whatever concession they need to get the tenant. Then they start to firm up the rents, and then they start to move the markets. Right now we're in the early stages of that, which is a positive.
In that space we cover two stocks, EastGroup (EGP) and Liberty (LRY). We have a "buy" on Liberty and a "hold" on EastGroup. Both are good companies. EastGroup, we'd note that they never did the overseas expansion or joint venture activity or huge development programs, so they are one of the few that actually never had to recapitalize during the downturn. Liberty as well played it fairly conservatively. On a valuation basis, we like Liberty. We find it more attractive than EastGroup, but both are fine companies. With industrial, I don't know that you have to run out and buy it today, because the market changes slowly. But while it may not have been on people's radar a few months ago, right now it's starting to look interesting in that there are signs of life, which is clearly a good thing. That said, it takes a while for that to flow through to the bottom line.
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