In the latest edition of Nareit’s REIT Report podcast, Nareit Senior Vice President for Government Relations Robert Dibblee and Nareit Vice President for Government Relations John Jones discuss the outlook for the 116th Congress.
With the House of Representatives now under Democratic control, and a divided Congress for the first time in nearly a decade—in addition to a looming presidential election cycle—prospects for legislative accomplishments are modest.
“There will mostly be gridlock where policy is concerned, which we’re seeing reflected in the recent government shutdown,” Dibblee said. Must-do items, such as appropriations bills and debt limit legislation, could be the only two exceptions to the gridlock for the next two years, he said. “However, the current standoff could have long-term impacts on every aspect of the legislative agenda that we can’t anticipate right now.”
Jones noted that “most issues will end up becoming polarized and it will be very difficult to accomplish anything of great importance during a presidential election cycle, especially beginning late 2019.”
Tom Bohjalian, Cohen & Steers’ head of U.S. real estate and a senior portfolio manager for the firm’s real estate securities portfolios, was a guest on the latest edition of Nareit’s REIT Report podcast.
Bohjalian sees REIT fundamentals in 2019 looking a lot like 2018, “with supply and demand largely in balance and with landlords still having some relative pricing power.” Cash flow and dividend growth on a per share basis should remain in a mid-single digit range for both 2019 and 2020. Asset values should also remain relatively stable.
Bohjalian shared the view that REITs remain significantly underrepresented in defined contribution (DC) pension plans. Increased investor education on the positive attributes of REITs, including strong returns, diversification, and liquidity, will result in investors moving away from a traditional equity and fixed income allocation to one that adds more alternatives, including REITs, he said.
“It will be a continued process of education and that will take time,” Bohjalian noted.
Sherry Rexroad, chief investment officer of the Americas and global real estate securities platform at BlackRock, Inc., was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Rexroad said sustainability is playing an increasingly central role in investment decisions at BlackRock.
“We really believe that sustainability-related issues, ranging from board composition and human capital to climate change, can, and often do, have real quantifiable financial impacts,” Rexroad said. BlackRock’s approach, she said, is to include environmental, social, and governance (ESG) information into the investment decision-making process as part of the risk and return analysis.
Gemma Burgess, managing director at executive search firm Ferguson Partners Ltd., was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Burgess commented on California’s move to require public companies to have at least one female on their boards.
“We see it as a great step forward. Moreover, the importance here is placed on the investor community and boards to do the right thing… I think we’re seeing that in huge numbers at the moment across the country,” Burgess said.
Lori Marks, a senior credit officer at Moody's Investors Service, Inc., was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Marks said overall credit conditions for REITs are “stable, as real estate fundamentals remain solid and REITs maintain healthy balance sheets.” Growth is slowing for many property types, she said, with REITs expected to generate low single digit net operating income (NOI) growth next year.
Moody’s expects REITs to maintain discipline as they seek investment opportunities, Marks said. “REITs are still able to issue unsecured debt at attractive, albeit higher, interest rates, and are also enjoying access to private capital as institutional demand for real estate remains strong,” she noted.
Diane Morefield, executive vice president and CFO of Cyrus One Inc. , was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
CyrusOne received an investment grade rating from Standard & Poor’s in September. Although the company welcomed the news, Morefield said the ratings agencies have been slow to understand the data center model. She noted that prior to the CyrusOne upgrade there was only one other data center REIT with an investment grade rating.
“Our profile, and that of the other data centers, is very consistent with the broader REIT industry,” Morefield said. She noted that more than 70 percent of CyrusOne’s customers are investment grade rated.
“We’ve suffered from being classified as … a non-traditional REIT category, which has caused the rating agencies to review our asset class, in our view, more harshly than other REITs,” Morefield said. Looking ahead, “we’re very optimistic that we will achieve full investment grade rating in the near term as the other rating agencies now catch on to our more traditional traits.”
Morefield also commented on CyrusOne’s focus on customer satisfaction. About 80 percent of leasing activity each quarter comes from existing customers.
Meanwhile, Morefield said CyrusOne’s biggest opportunity for 2019 lies in international expansion. “We are well on the way to having a really strong footprint and portfolio throughout Europe,” she noted, while the company is also investing in data center platforms in China and Latin America.
Lisa Kaufman, global CEO and Americas portfolio manager for LaSalle Investment Management Securities, was a guest on Nareit’s REIT Report podcast, recorded in San Francisco during Nareit’s REITworld: 2018 Annual Conference.
Kaufman said operating fundamentals are in equilibrium across most real estate sectors, with internal growth likely to roughly match inflation for the next couple of years.
Among the outliers, however, are cell towers, where the runway for growth is “longer and better than what the market perceives,” she said.
Bernhard Krieg, managing director and portfolio manager on the real estate equities team for Brookfield’s public securities group, was a guest on the latest edition of Nareit’s REIT Report podcast.
Krieg discussed some of the factors that he and his team use to evaluate the global real estate securities landscape and commented on the gap between public and private real estate valuations in the United States.
As for where he sees some of the best value opportunities in the U.S. market, Krieg pointed to high-quality shopping malls.
“We think there’s a really big opportunity that exists for some of the larger, well-capitalized mall operators that are currently trading at a significant discount to their underlying market valuation,” Krieg said.
Jim Berry, U.S. Real Estate leader at Deloitte & Touche LLP, joined the latest edition of Nareit’s REIT Report podcast to discuss Deloitte’s newly-released 2019 Commercial Real Estate Outlook.
The outlook surveyed 500 global commercial real estate investors on the factors that will drive their investment decisions in the year ahead.
Berry noted that more than 97 percent of those surveyed indicated they would increase their capital allocation to real estate in the next 18 months, despite concerns about interest rates, trade tariffs, tax reform, and Brexit uncertainty.
At the same time, investors plan to diversify their portfolio, “to capture the evolution of the real estate market due to the changing nature of work and tenant preferences,” Berry said.
Meanwhile, the Deloitte report refers to certain real estate companies as “change agents,” due to their ability to alter the view about how physical space is used today. “Every company at this point has an opportunity to advance the ball, to adopt some of these change agent-type mentalities…it’s no longer an option to sit still and follow the old models,” he said.
Berry also noted that pension fund survey respondents are planning to increase their capital commitment to real estate by 9 percent over the next 18 months—and a “significant portion” of this could be directed toward REITs.
“It’s not just the largest REITs, but probably some of the midsize and smaller REITs, that have an opportunity to capitalize on these institutional investors as they plan to expand beyond just core markets in search of additional yield,” Berry said.
Evan Marble, a member of Chatham Financial’s hedge advisory team, was a guest on the latest edition of Nareit’s REIT Report podcast.
Marble discussed the planned transition away from the London Interbank Offered Rate (LIBOR) in favor of the Secured Overnight Financing Rate (SOFR). LIBOR is currently the predominant interest rate benchmark for the dollar and other global currencies and is referenced in instruments with “hundreds of trillions” of dollars of notional value, he noted.
LIBOR is expected to be discontinued after 2021. SOFR was released on April 3 and is now publicly available. In July, Fannie Mae issued the market’s first-ever SOFR securities, followed by the World Bank and MetLife in August.
“The market’s transition from LIBOR as a base borrowing index impacts most if not all of our real estate clients and the market broadly,” Marble said. It will impact newly-issued and legacy floating rate mortgages, corporate lines of credit, bank term loans, commercial mortgage backed securities (CMBS), as well as the market for interest rate hedges, he explained.