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.
Jon Bortz, chairman, president, and CEO of Pebblebrook Hotel Trust, was a guest on the latest edition of Nareit’s REIT Report podcast.
Early in September, Pebblebrook announced it would pay $5.2 billion to acquire fellow hotel REIT LaSalle Hotel Properties, ending a series of revised offers that began in March. The deal is expected to close later this year.
Bortz, who founded both REITs, said the two companies share an “incredible similarity” in terms of assets, quality, markets, geography, and brands.
Pebblebrook has said it plans to sell between $500 million and $1 billion of assets from the combined portfolio. The bulk of sales are likely to come from the LaSalle side and from the East Coast, Bortz said. “The sales will allow us to finetune the portfolio from a size and diversification perspective,” he noted.
Looking ahead, Bortz said a number of opportunities exist within the LaSalle portfolio.
Sara Neff, Kilroy Realty Corp.’s senior vice president for sustainability, was a guest on the latest edition of Nareit’s REIT Report podcast.
Kilroy was recently named a global sector leader in the 2018 GRESB Real Estate Assessment.
The West Coast office REIT has set a goal to achieve carbon neutral operations by the end of 2020. Neff noted that although buildings generate 40 percent of carbon emissions, they are still largely overlooked by both the real estate and the larger environmental community. Kilroy is attempting to change that and has already put agreements in place to reach the 2020 deadline, Neff said. “We are going to deliver.”
Brad Case, Nareit senior vice president for research and industry information, was a guest on the latest episode of Nareit’s REIT Report podcast and discussed the impact of emerging blockchain technology on the real estate industry.
Developed in connection with cryptocurrencies, blockchain is “essentially a set of practices that make it possible to keep records of who owns assets,” Case explaied. He noted that although blockchain is not the same as distributed ledger, for the purposes of considering the effect on real estate, the two terms can be treated as synonyms.
Blockchain can establish ownership of an asset much more efficiently than at present, Case said. In addition, the technology makes it possible for governments to keep property records used for tax purposes at a reduced cost and lower probability of fraud.
Conditions across the entire hotel industry are “very healthy,” said Ashford Inc. (NYSE American: AINC) Co-President and Chief Strategy Officer Rob Hays, who was a guest on the latest edition of Nareit’s REIT Report podcast.
Ashford advises two REITs, Ashford Hospitality Trust, Inc., which focuses on the full-service segment, and Braemar Hotels & Resorts, which concentrates more on the luxury sector.
Supply growth is holding firm at around two percent, while demand is staying ahead of that, Hays said. The industry has also seen some occupancy gains, combined with inflationary-type room rate increases, he added.