The discount to NAV that public REITs are trading at—despite the strength of the private real estate investment market—was a major topic of discussion at the 23rd Annual REIT Symposium, hosted by New York University’s Schack Institute of Real Estate. Many of the event’s panelists shared their thoughts on the reasons behind the trend, but, as CEO of New York REIT Wendy Silverstein noted, the NAV gap is “a hotly debated topic with no obviously right or wrong answer.” Here are some key takeaways from the event, which was held Tuesday at The Pierre hotel in New York City.
- The spreads between public versus private REIT valuations are the widest they have ever been. “We haven’t had average discounts at this level since we were well-hated during the tech bubble a long time ago … we think the disconnect is too big,” noted Theodore Bigman, managing director and head of global listed real assets investing at Morgan Stanley Investment Management. But while public REITs have not been considered attractive lately, the private market is the opposite. “We’re living in a weird world where private real estate is sought after and private securities are shunned,” Bigman noted. Jon Cheigh, executive vice president and global portfolio manager at Cohen & Steers, said the big discounts indicate the public market is leading the private market. “We do think that the REITs look cheap versus private real estate, but we think that some of this gap between perceived discount to NAV is probably just telling us that we’re going to see little real price growth and potentially some nominal declines to commercial real estate values over the next few years,” Cheigh said. Silverstein said the private market may be more appealing to investors not keen on contending with the price volatility that public companies face in the stock market. “If you’re going to have the exact same collection of assets in a private company, I do think the values are more accurately reflected there. [There are] all sorts of headwinds that come into the public market valuation equation that are very disconnected from the actual value underlying real estate,” she said.
- There are fewer incentives for M&A activity in the REIT space. Panel moderator Mary Hogan Preusse, former managing director and co-head of Americas real estate at APG Asset Management US, noted that the industry appears primed for increased M&A activity, given the sector’s duplicative strategies and succession issues, but that activity hasn’t materialized in recent years. Instead, there have been a number of REIT spin-offs. One key reason behind the lack of M&As is that management teams do not have the incentive to undertake such processes, says Sherry Rexroad, managing director and senior product strategist at Blackrock. “It’s job preservation,” she noted, adding that there also are not enough valuation differences among companies to overcome transaction costs. Rexroad said she believes the motivation for an M&A would have to come from a private player acquiring a public company.
- Nevertheless, some sectors may be poised to see public to public M&A activity. Cheigh said storage and student housing REITs, along with other operating companies whose platforms add significant value, could be ripe for consolidation. Retail is another possible sector for publicly-traded REIT mergers, given the challenges the industry is experiencing, he added. “Value is going to be created by being bigger and having the ability to make the right investment decisions,” Cheigh noted.
- The single-family rental (SFR) space, marked by a handful of public companies, may see room for new players to grow. While there is now a number of public companies because of the benefits of scale and previous consolidation moves in the space, there are some private players still. “It is conceivable we see more IPO activity and it is conceivable to see new entrants seek to build scale,” said Todd Eagle, who spoke on a panel on consolidation trends across the housing sector. The public companies have focused on a small segment of rental homes in the country, looking at factors such as rental yield based on acquisition, newer homes and school districts. “While it’s a fairly narrow footprint today, it would need to be seen how that evolves over time,” Eagle noted.
- Sam Zell, chairman of Equity Group Investments, said he is “extraordinarily careful” about share buyback activity. “Having liquidity on your balance sheet, having liquidity in your company, is ultimately the definition of value,” he noted. “It’s only under unusual circumstances do I endorse buyback and then I want to make sure I’ve got a bigger spread to cover the cost of playing the game.”
- Pricing for private assets is fair, but it’s cheap for publicly-held assets, said Mike Kirby, chairman and director of research at Green Street Advisors. “At least if we are going in for something bad, we’re not overpriced to begin with,” he noted. “The state of affairs in the real estate world is shockingly good for this late in the cycle.” The discipline the sector is seeing from the capital side is “fantastic,” he added, noting that supply deliveries have slowed after ramping up in several sectors. Kirby noted, however, that Green Street’s property price index is the only one showing that valuations, overall, have been ticking downward over the past 12 months.