Former UBS Director And Senior REIT Analyst Reveals His Top Choices And His Expert Advice On The Sector
February 12, 2010 - The Wall Street Transcript has just published REITs Report offering a timely review of the REIT 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.
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Alexander D. Goldfarb is an Associate Director and the Senior REIT Analyst in the research department of Sandler O'Neill + Partners, L.P. Mr. Goldfarb joined the firm in 2009 following two years as a Director and Senior REIT Analyst at UBS, and five years at Lehman Brothers, where he was a Vice President and REIT Analyst. Mr. Goldfarb has covered the major property types, and has appeared in print media and on television, including The Wall Street Journal, Barron's, BusinessWeek, Forbes, Bloomberg and CNBC.
He has also presented at real estate and private equity conferences. Before starting a Wall Street career, Mr. Goldfarb worked in the consumer goods industry at companies such as Unilever and Information Resources, Inc., where he worked on the Pepsi-Cola account. Mr. Goldfarb holds a MBA from the F.W. Olin Graduate School of Business at Babson College and a Bachelor of Arts from Wheaton College.
TWST: I thought a good place to start would be your overall outlook for REIT company and stock performance as 2010 gets underway. REITs certainly seem to have bounced back in terms of stock price, although this past year was one of fairly dismal news for the commercial real estate market in general. What are your thoughts and outlook going forward?
Mr. Goldfarb: We maintain our positive bias for the REITs. We don't have a price target per se but think that the REITs should continue to do well. That said, valuations are towards the high end. The multiples are about 16.5 times FFO, versus historic 13.2. Dividend yields are back towards matching the 10-year treasury. They are not as juicy as they were previously. There is limited dividend growth in the near term because earnings are still going to be pressured this year; capital is still a precious commodity.
And unless you are forced to raise your dividend because of taxable income, why would you? No one seems to care about dividends, so why would you raise your dividend, right? Certainly, I would expect companies to switch back to a cash dividend given the vote of confidence that paying cash dividends provides to the market. Vornado (VNO) did it earlier this week. Simon (SPG) has indicated their intention to go back to a cash dividend. So we would expect that companies that can go back to cash dividends instead of the stock dividends will do so sooner than later. And I do think that's a positive that people will notice.
I think the real question for REITs this year is, the way they are priced, if interest rates or credit spreads widen without a concurrent improvement in the economy, i.e., stagflation. That's not good for REITs. Real estate is traditionally viewed as an inflation hedge, but the way the REITs are priced, I don't think that's the case this time. If you own physical real estate and it's properly levered, and you are comfortable with the rent roll, then, yes, absolutely it's a good inflation hedge.
TWST: I believe REITs just received a two-year extension to continue to pay dividends in stock rather than cash. It sounds like you don't think many REITs will avail themselves of that, though.
Mr. Goldfarb: I think there are three things. One, it's a non-event because the government has acquiesced to everything. The government will not force a bad decision, so of course the IRS was going to grant an extension. That was a given. Two, even if they didn't, you could always get a private-letter ruling for an 80% stock dividend. Three, I don't think it matters. I think there is a stigma to the stock dividend, which I think is a good thing. So thankfully companies that can are going away from it.
It may have been a prudent measure last year, when the world was coming to a halt and you couldn't get credit anywhere; companies were making a rational argument - "Hey, let's conserve capital." And certainly for a company like Simon, which had neatly laddered maturities - but they happened to be really big maturities - it was the right decision. It may not have been one that you liked as an investor because you want cash, you don't want stock, but they had to think of the long-term interest of the company. To preserve that amount of cash, to be able to manage their capital needs was the prudent thing to do.
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