INTERVIEW: Investors are driving niche business, says NAREIT head

Editor's Note: On May 1, 1997, the National Association of Real Estate Investment Trusts (NAREIT) hired Steven Wechsler to be its new president and CEO. Previously, Wechsler had served for 13 years as president of the National Realty Committee in Washington, D.C.

Recently NREI Editor Ben Johnson interviewed Wechsler specifically for this special REIT Showcase to gauge his views on the new job and the expanding public real estate marketplace unfolding before him.

NREI: It seems these days you can't turn on the TV or pick up a newspaper without seeing a REIT making news. How does it feel to have so much attention paid to the public real estate sector?

Wechsler: It feels quite exciting. Not only am I excited by it, but it's clear that the participants in the REIT industry are excited and gauged as a result of this attention. It's a very healthy development.

NREI: I've never seen so much coverage of REITs in the mass media, let alone the trades.

Wechsler: You've never seen so much coverage of REITs because never have we had so many REITs that are making news in terms of performance. The real estate sector, and REITs in particular, have been strong performers in recent years, and that attracts attention.

NREI: You've been around Washington long enough and real estate long enough to know that nothing lasts forever. How long do you think this run will last? Some people say they're here to stay.

Wechsler: The increased interest level in REITs will continue. Whether it will be at the intensity it's been over the last several months, and likely to be over the next several months, remains to be seen. But the overall interest level has grown and will continue to grow. As far as the runup in REITs, if you're talking about the whole REIT phenomenon, the private to private phenomenon we've seen in recent years, I think that will continue for some time. If you're talking about predicting the performance of REITs with respect to price in the market, that really is crystal ball gazing. But if you're talking about the migration of private real estate to the public format through REITs, I think that continues for some time to follow.

NREI: Congress created this format years ago, and anytime something is successful, they like to stick their fingers back in the pie if they can. Do you see any legislative issues out there on the horizon that might impact how REITs are structured and how they could be allowed to perform in the next few years?

Wechsler: It's important to note that, as we speak, the House and Senate and President have agreed upon a budget package which includes the REIT Simplification Act. So what we're seeing once again is Congress and the administration basically ratifying and approving the REIT vehicle, the REIT legislative structure, and in fact improve and modify it through the REIT Simplification Act. So, if anything, we're seeing a current blessing of the REITs by the legislative marketplace here in Washington.

Going forward, part of the job will be NAREIT's and the REIT industry's to communicate effectively about REITs, what they are, who they are, why they exist, both inside Washington and out, to ensure that the mandate we have can continue.

NREI: What do you feel is your mandate, your role in this as the president and CEO of this association?

Wechsler: NAREIT has two fundamental missions. The first is to communicate effectively inside Washington and in the states with policymakers to ensure that the REIT industry and the REIT vehicle is understood, appreciated and continue its mandate. The second mission for NAREIT is to communicate beyond the policymakers to the investment marketplace to the investing public, to the investing analysts, to the financial media and press, about the REIT industry, about REITs and real estate investment, and to ensure that people understand what's involved and how it works. Those really are the core missions of the organization. They're grounded in national policy, and the policies and practices surrounding REITs, and they're grounded in the industry's interest in educating the public about real estate investments through REITs.

NREI: So why did they hire you?

Wechsler: My background ... obviously I'm trained as an attorney, I served as an advocate for the real estate community formany years with experience in dealing with national policymakers and national issues, and my connection to real estate and policy issues and advocacy gives me a strong background to lead NAREIT.

NREI: You were at NRC long enough to see one of the worst cycles of real estate in a long time.

Wechsler: Since the 1920s and 1930s.

NREI: So you're aware of the cyclical nature of real estate as well as everyone else. But are there certain aspects of the REIT structure that will help to weather the next down cycle?

Wechsler: The collection and dissemination of information associated with real estate on a public basis which we're seeing through REITs as well as what's happening in the CMBS market today on the other side of the coin, will help ensure that there is a more efficient marketplace at work, and I think that will tend to leaven the extremes. It will tend to ameliorate the extreme lows of the cycle. Basically it will reduce the severity of the down cycle, is my analysis, I think, as information is out in the marketplace.

NREI: Last year (1996) it was widely publicized that REITs outperformed the S&P 500 index. I won't ask you to look into your crystal ball and put on your forecasting hat because it's not your function in life, but I'm sure you have an opinion on whether the public markets themselves to date have fairly valued REITs based on the quality of the underlying assets and the fundamentals of real estate. Have they done a decent job of that?

Wechsler: The public markets are increasingly reviewing and evaluating REITs like other companies in the marketplace, and I think that's appropriate.

NREI: Have the analysts done a good job?

Wechsler: The analyst community has been educating itself about REITs and real estate investment in recent years and is becoming increasingly sophisticated and is going about its job. They bring to the table a lot of skills and a lot of judgment that has been used in the past in the non-real estate sector, and much of that is fully appropriate in the real estate and REIT sector.

NREI: So it's mainstreaming real estate with the traditional corporate sector?

Wechsler: That's right. Clearly there are some special attributes and characteristics to real estate but those can be worked within the more conventional structure.

NREI: What about the rating agencies? To date, no REIT has a rating above BBB. Why not at least one A- rating?

Wechsler: I think over time we'll see that as there are established track records and performance.

NREI: So it's still a fairly young market?

Wechsler: Although REITs have been around since the 1960s, the current era began in 1991. I think over time, given performance and appropriate future prospects, we'll begin to see higher credit ratings for some of them.

NREI: Why was 1996 such a banner year for REITs, and what's ahead for the whole of 1997?

Wechsler: '96 was a banner year in part because the real estate marketplace generally still had a significant ways to go to reach some equilibrium in terms of pricing given the severe real estate deflation we saw during the real estate recession. Some of that got captured in what took place in 1996, some of it was related to the performance and earnings of many of these REITs. The REIT sector as a whole performed well because it was oriented toward current income and growth, and the growth was taking place.

NREI: How does 1997 look? We've already seen two of the industry's largest IPOs with Equity Office and Boston Properties, and the secondary market's been red-hot also.

Wechsler: What we've seen in '97 shows continuing significant interest in REITs and real estate investment. We're midway through the year and we expect much of that level of interest to continue through the rest of the year. In terms of REIT performance relative to the S&P 500, it remains to be seen where the year ends up.

NREI: Most of the IPOs and seconds are far over-subscribed by multiples. What do you make of that?

Wechsler: By and large it indicates that there are solid companies coming to market with good business plans in place and established track records, if you look at the more recent deals.

NREI: One of the most interesting or unusual recent deals was the CCA Prison REIT IPO. That was an interesting niche concept, and is it a precursor of things to come? Is it time for the market to start turning to different niche plays?

Wechsler: I think the extension of the REIT marketplace will continue. The prison REIT is an example of that extension. We're likely to see it in other areas as well. After all, real estate touches upon our lives in virtually every sphere, and since REITs are rooted in real estate, we shouldn't be surprised when creative people present to us different ways to invest in the real estate in this country that produces income. Some of that is real estate in prisons, some of that is healthcare facilities, some of it's offices, some of it's warehouse, some of it's in myriad other uses whose income will be captured and collected into REITs. So I think we'll continue to see that.

NREI: What do you think of another recent proposal that was interesting: Kimco's decision to potentially split into two companies, one a fast-growth company and the other a more stabilized long-term growth strategy?

Wechsler: Generally, I believe we will continue to see variations on the REIT theme to provide investors with what they want. Some of those may well be REITs that are growth oriented and others may be REITs that are more income oriented and some will be a combination.

NREI: Have you heard of any new structures or financing vehicles that REITs can avail themselves?

Wechsler: I would point out that we've seen REITs increase the use of unsecured debt in a meaningful way since they've raised over $2.5 billion this year already in that arena and we're expecting to see that continue.

NREI: REIT observers have been talking about the pending consolidation for years now it seems. Is it about to really take off?

Wechsler: It's happened but limited. If we had 226 REITs in 1994 and now we've got 195, so we've got a 10% -15% reduction in the number of public REITs, so that's some consolidation. But at the same time I'd say that's a story to be written. The story that's taking place today in a meaningful way is the movement from private to public.

NREI: What are the factors that will continue driving that?

Wechsler: It's happening apace through acquisition, REITs acquiring privately held properties rather than the IPO market. About half of the key properties acquired this year have been acquired by REITs. So I think what we're seeing is the migration from private to public through REIT acquisitions as well as REIT mergers with non-REIT companies. Part of that's being done utilizing UPREIT structures, part of it's being done through straight-out acquisitions.

NREI: What do you make of the first-quarter 1997 market correction in REIT prices? Was that a blip on the radar screen or some other sign?

Wechsler: I don't think I'd read too much into that. Every marketplace has its ups and downs. REITs had a very strong fourth-quarter performance last year and we saw some correction in the first quarter. I think it's pretty much that simple.

NREI: What are some trends we can look for in 1998 and 1999?

Wechsler: Trendwise, I think the continued growth of the equity REIT marketplace, particularly in terms of market capitalization, is going to grow through acquisition, consolidation and private to public, in part fueled by increasing institutional investor interest in the REIT format, largely with respect to pension capital. I'd also look in 1998 and 1999 for increasing global interest in REITs, both in terms of foreign investment into the United States in terms of REITs as well as conceivably REIT investment in other countries.

NREI: What is NAREIT's role in educating REIT management about some of the more operations-oriented trends that are occurring in the industry, including issues related to the continued strong emphasis on growing earnings and the potential for using greater amounts of borrowing leverage?

Wechsler: An important part of NAREIT's function is to help REIT leaders and the REIT industry communicate among themselves, and part of that is education. Part of it is discussion about industry trends and practices, and we will certainly be doing that over the next several years.

With respect to leverage in and of itself, REITs clearly in the real estate context have practiced very low leverage. One can debate whether there is room for some growth there in terms of the amount of leverage, and I'm sure that will be an issue of discussion and interest for the next several years. The real question is what is the appropriate level for an equity-oriented REIT.

NREI: Next month will mark your first NAREIT conference as head of the association. The theme is "In Real Estate We Trust." Who came up with the theme and what does it mean?

Wechsler: The program committee that we convened collectively came up with the theme, and what it really means is that REITs are fundamentally rooted in real estate and basically the NAREIT community and the REIT industry puts its trust and faith in the REIT format, as do investors in REITs. The conference will be all about REITs today and address some of the key issues that the REIT industry is talking about, whether it's consolidation, REITs joining the mainstream of Corporate America in terms of governance and practices, whether it's how REITs access the debt markets in the best and most efficient way, these will all be topics for discussion at the annual meeting.

NREI: How do you like the new job?

Wechsler: I like it a lot. The REIT industry is a very dynamic, fast-changing business, and what's particularly exciting about it is the rate of change and the sense that the industry is writing the script as we go along, because the future is before us and it's happening daily. NAREIT itself has played a pivotal role in recent years in helping the REIT industry develop and grow, and I would hope to lead it to continue to do so in a fast-changing world.

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