REITs or Real Estate Investment Trusts provide current cash on cash returns in addition to a piece of increasing real estate values.
Alexander D. Goldfarb, Managing Director and Senior Research Analyst, Piper Sandler.
Essex Property Trust is one of the 3 top picks from Alexander D. Goldfarb. Mr. Goldfarb is a Managing Director and Senior Research Analyst at Piper Sandler.
Previously, he was a Managing 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.
“Any good real estate person would tell you, it’s never been a better time to own real estate, right?
If you ever find a real estate bear, you know they’re not involved in the industry.
So, that’s for starters.
That said, last year was certainly a tough one for REITs.
They definitely underperformed the broader market on elevated interest rate concerns.
And this year is no different; the 10-year has been volatile so far.
It was trending up towards 5, now it’s pulled back in.
The group was selling off, now it’s rallying.
So, the macro is what’s driving the performance of the stocks, less so the fundamentals.
What’s really interesting, and one of the reasons why we’re so bullish on real estate, is if you look back since the end of the Second World War, every time this country has had a boom-bust in real estate, there’s either been excess inventory, excess availability, some issue in the banking system — and if you look today, we actually have none of that.
Occupancies are pretty healthy.
We have economic and employment growth.
Very little new supply, even in apartments, where there is a massive supply wave that’s coming to an end this year.
The cost of construction is daunting, such that for the most part, it doesn’t really pencil.
Banks aren’t providing construction loans, so anyone who is building is doing it from their own pocket.
And the final element are the banks, which the regulators are not pressing to foreclose, so a lot of lenders are doing blend and extend.
I think initially there was a general view that blend and extend was not a legit strategy, but people have quickly come around to realize that it’s no different than if a freighter runs aground: The owners don’t immediately call in the breakers to rip the ship apart and junk it, right?
They wait for the tide to do its thing.
Will the tide be able to refloat the ship?
Same thing with loans.
Just because a loan may not be compliant with today’s lending terms doesn’t necessarily mean it’s a bad loan if the lender and the operator can see where the income growth of that property is going.
Clearly, there will be bad loans. No NOI, it’s going back to the lender.
But otherwise, the regulators realize that there’s no point in pressing banks to aggressively foreclose or recapture, take back loans if they don’t have to.
And the positive for REITs is, because the REITs tend to be lower levered than the private sector, and they have access to public equity, they’re just in a better capital position to be able to execute their plans and take advantage of real estate that comes to market.”
REITS or Real Estate Investment Trusts are Alexander Goldfarb’s bread and butter.
“Right now, real estate is actually in a great position.
Think about rents that are biased to the upside, because replacement cost still exceeds where buildings are trading at and there is no new supply; you have a growing economy; and tenants are much more conscientious about the quality of the landlord.
What that means is that dividends should steadily grow, and asset values should increase.
The hindrance to asset values is rising debt costs, but assuming debt costs stabilize and then the rent streams grow, that’s a positive for valuations.
So, REITs should be able to prove that they have an upward bias and inflation protection about them.
And in an environment like today, where we still have inflation pressure, that should be a positive.
If you look at the Trump policies’ bigger picture — less regulation, more energy production, getting government out of the way — these are all positives.
I don’t think many people would say having government involved in the market is a good thing.
It’s like elementary school; you don’t want the teachers in the playground.
You do want the teachers watching to make sure that kids aren’t fighting with each other, but you don’t want them directing how kids are to play.
And that’s what government should be — make sure that the rules are enforced, make sure that everyone is staying in their lane, make sure that at least the way the markets operate is fair.
But as far as how companies interact, how the private sector works, that’s something that the private market should do.
Pulling government out of that, promoting more energy production, more natural gas, more oil — people forget that tractor-trailers drive, figuratively and literally, a lot of the economy.
You can see it right now, that the push into EVs or windmills or solar ends up adding cost, and it makes the grid more unstable, it makes energy costs higher, it pulls dollars away from other areas that could be put to work in a better fashion.
The interesting thing is, people will say, well, tenants today, they want green buildings, or they want renewable. I disagree.
People want inviting environments.
There’s no one who says, give me a dirty, less efficient building.
People want windows, they want a lot of natural light, they want open landscapes.
They don’t want pollution.
But when you build a building and you make it efficient for operation, and it has all the qualities that the tenants want, that’s the important part, not necessarily a check the box.
As a result, I think under Trump, real estate benefits in that regard, because hopefully it means that there’s less focus on getting a green stamp of approval versus building efficient buildings that tenants want.
Often they may be the same thing, but not always.”
There are 3 REITs that Alexander Goldfarb recommends.
“Our top pick for the year is Essex (NYSE:ESS), and this was done at the beginning of the year, before the L.A. fires, so it’s not related.
The reason why we picked Essex as our top REIT for the year is we like the market positioning.
Very little new supply on the West Coast versus the rest of the country.
Second, you had the continued unwind of the COVID rent moratorium; apartment units are replacing non-cash-paying renters with actual legitimate cash ones.
And then finally, Northern California has lagged since COVID and rents have barely moved, whereas rents everywhere else are up 20%-plus.
So, there’s a lot more upside, especially as tech hopefully this time gets back to work in the office.
So, we like Essex a lot.
There’s another company, Curbline (NYSE:CURB), which is the spinout of SITE Centers (NYSE:SITC), focused on convenience retail.
What’s really impressive about this story, apart from the fact that it was well seeded with capital — $800 million in cash, debt free balance sheet — is rarely in REITland do you see management teams take on an entirely new challenge.
Meaning, this management team said, you know what, SITE is a good company, but it doesn’t have the future that we think can be competitive, so we’re going to create this new company and spin it out of SITE, call it CURB, and focus on convenience retail assets.
And they haven’t said it, but our view, and the market’s view, is SITE is going to be liquidated, similar to what this management team did with RVI a number of years ago.
That really captures people’s attention, because they are truly taking 100% risk.
If they stayed at SITE, they could just clip a coupon on compensation, try their best, and attend NAREIT twice a year.
Here, they’re actually trying to create a whole new company, and that’s something that we generally don’t see often, apart from IPOs.
I think that speaks volumes.
The company is well set up.
Earnings growth north of 10% a year.
Certainly from a balance sheet capital position, well stocked.
And, so far it’s resonated well with investors.
Another name that we continue to like is SL Green (NYSE:SLG).
The management team is highly productive.
Whenever they have announcements, it’s almost always good.
Hard to think of an announcement they’ve had that has not been additive.
And they really have a lock on Midtown office around Grand Central, which is one of the hottest, if not the hottest, submarkets for office in the country — that and Century City in L.A.
So, they’ve really done well in concentrating their portfolio, and they’re benefiting right now as availability rates on Park Avenue have dropped below 7%.
Even in premier office, availability is below 7%.
Rents continue to move upward.
And what’s good for the buildings is that the operating expenses and the leasing costs really don’t change, so all of that accelerating rent just drops to the bottom line.”
REITs are the investment vehicle focus for 2025. Read all the interviews, exclusively in the Wall Street Transcript.
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