REIT CEOs: It’s Good To Be Public

NEW YORK CITY-From stock prices that had cratered two years ago, REITs have roared back, producing acquisition volume this year that outpaces that of institutions, private equity or foreign investors. Key to this success was REITs’ acumen—and gumption—in raising capital through the public markets, said a panel of CEOs at REITWorld 2010 Monday afternoon. As a measure of their success in this arena, the executive board of the National Association of Real Estate Investment Trusts rang the opening bell at the New York Stock Exchange Monday morning, prior to kicking off this year’s edition of the association’s annual convention.

“I told CEOs, ‘if you raise capital, it will demonstrate to the market that you’re a survivor,” recalled Martin Cohen, co-chairman and co-CEO of Cohen & Steers Capital Management, of those uncertain days in 2008 and early 2009. A few companies found the “courage” to go to the public markets, said Cohen, and then others followed, to the tune of $35 billion raised through equity offerings in ’09. Year to date, 2010 has already matched that figure, said Debra Cafaro, outgoing chair of NAREIT, in opening remarks prior to Monday’s panel.

Given the challenges they’ve faced during their 50-year history—none more severe than the Great Recession, Cafaro said—REITs have managed in the public sector far more capably than most observers had expected, said Michael Fascitelli, CEO of Vornado Realty Trust. “Running a public company that’s that visible is not the same as running a private company,” said Fascitelli. By and large, he added, “the industry has done a hell of a job.”

If the REIT sector didn’t reach the $500-billion to $1-trillion level some had predicted for it—currently, the public REIT sector has a combined market cap of about $335 billion, while non-traded REITs account for another $65 billion—it’s partly because the companies sold billions of dollar worth of properties, generating great returns for investors, Cohen said. He noted that REITs have succeeded largely through adhering to some fundamental business practices: good business skills, a capable organization and adroit management of finances.

“The heart and soul of our industry is capital allocation,” said Scot Sellers, CEO of Archstone, an apartment REIT that was taken private in a $22.2-billion 2207 deal. He hinted that Archstone could one day go public once again, although he added it ultimately was not his decision to make.

Looking ahead, panelists cited simplicity, transparency and lower levels of debt as keys to “not screwing it up” this time around. Investors will want to invest with companies that are going to be accountable and strive not to “look stupid” by losing the money, said Guillaume Poitrinal, CEO of Unibail-Rodamco, said to be Europe’s largest publicly traded commercial real estate firm.

Fascitelli said there was nothing inherently wrong with CMBS, but it had been abused at the height of the previous cycle. Recalling with dismay the challenges of trying to parse the complex capital stack in one securitized transaction, he said, “CMBS was meant to be simple, not an IQ test.” Even so, Fascitelli said, “REITs have the wind at our backs, and we have a window of a couple of years.”

Panelists agreed that interest rates will rise, and in fact two predicted that higher rates would be a topic of discussion for a CEO panel at REITWorld 2011. “It’s fantastic what low interesr rates can provide as a source of comfort for real estate investors,” said Poitrinal. “The question is what comes next.”

While Sellers said Archstone is doing better with raising development capital than acquisition capital, and has three multifamily projects in the works with another six or seven coming next year, Fascitelli said the numbers don’t justify office development, especially not in Vornado’s backyard of New York City. He predicted that Washington, DC would be the first office market back up to full strength, followed by New York; the other markets, he predicted, will take longer to rebound.

Moderating the discussion was NAREIT’s ‘11 chair, Bryce Blair, chairman and CEO of Avalon Bay Communities. In opening remarks, Blair shared a couple of the association’s priorities for the coming year. One is passage of the so-called Updated & Streamlined REIT Act, intended to modernize existing rules for the trusts. Another is communication: “we simply need to do a better job of telling the REIT story” to investors, Blair said.