MIAMI—When it comes to REIT holdings, there are plenty of opinions. Terrell Gates, founder and president of Virtus Real Estate Capital, has a few of his own.

Since forming 2003, Virtus has launched 35 funds that have invested in 145 commercial properties with a combined value of more than $2 billion. The company has established a track record in marketing real estate developments that are well positioned for success across the real estate cycle.

GlobeSt.com caught up with Gates to discuss his take on REIT holdings. Be sure to return to this afternoon's Miami edition for part two of this exclusive interview.

GlobeSt.com: Is now the time to reduce REIT holdings?

Gates: REITs' performance are more correlated with the S&P 500 than they are necessarily with the underlying performance of their property holdings. Although there are exceptions, it's clear that REITs in general are investing more with the short-term in mind similar to many publicly traded companies, basically to enhance quarterly earnings and/or improve the perception Wall Street analysts have so their buy ratings cause the REITs earnings multiples grow, rather than taking a longer term view toward value creation of the underlying REIT properties.  

This approach inevitably catches up to you. If you believe like I do that there will be softness in the stock market in the intermediate term, then in light of the correlation of REITs and stocks, there will likely be softness in REITs.

On one hand I actually think it could be worse for REITs, because REIT multiples are so high and REIT's continue to buy properties at extraordinarily high valuations. They have to in order to increase FFO, even if it's incrementally, to support their dividends in a shrinking yield environment. When those multiples revert to the mean and when interest rates go up bringing cap rates with them, the REIT will have the double-whammy of shrinking earnings multiples and an erosion in the values of their underlying properties.  

Having said that, multiples could stay artificially high as investors concerns for inflation return and there's a flock to REITs as an inflation hedge. For REITs to win long-term, they need to buy solid assets within their long-term strategy at an attractive cost basis and focus on increasing NOI of those assets over the long haul. That will generally allow a REIT to ride out the short-term swings of the stock and public REIT markets while driving long-term shareholder value.

GlobeSt.com: Are REITs in some sectors performing better than others—or will they in the future?

Gates: Of course. Even though correlations within REIT categories have increased recently, there will be clear winners and losers.

As far as categories of REITs, I'm clearly biased given the property types on which we focus, but I think the lower correlated REIT property types that are more resilient to capital market swings and economic cycles will generally outperform over the long-term.

Historically, self-storage and healthcare have been examples of those categories.  Although I sure don't like the valuations that many of the REITs are having to pay for new storage and healthcare acquisitions, I believe the long-term fundamentals of those property types remain sound.