REITs Learned Recession Lessons

http://www.reit.com The economic recession validated the wisdom in REITs maintaining conservative balance sheets, and the industry is taking that lesson to heart, according to Scott Craig, vice president and portfolio manager with investment firm Eaton Vance Investment Managers.

In a REIT.com video interview at REITWeek 2011: NAREIT's Investor Forum at the Waldorf=Astoria in New York, Craig reviewed the state of the industry in the wake of the economic downturn. He said the recession only served to strengthen his opinion on how REITs should structure their balance sheets.

"I've always been relatively conservative when it comes to how I think REITs should structure their balance sheets, and following the recession, my conviction in that is firmer than ever," Craig said. "I think the recession demonstrated that low leverage is better than high leverage. I strongly prefer to invest in companies that have a conservative balance sheet philosophy. I think if you look at the REITs, many have learned the right lessons from the recession."

In analyzing REIT share prices in the current market, Craig said he doesn't think valuations have been overheated by the rebound. He did note that the market's implied capitalization rate is approximately 6 percent, while the multiple of adjusted funds from operations stands above 20. That indicates REITs are fairly valued, Craig said.

"I think it would be very difficult to argue that REITs are cheap," Craig said. "I think they are valued at the higher end of a reasonable range."

Craig pointed out that the constrained supply of new building means new demand will flow to existing properties. Consequently, this should boost REITs' cash flows, according to Craig. Additionally, he noted that REITs aren't trading at major premiums to their net asset values, another positive sign for the industry. Lastly, he said the growing demand for investment products to hedge against inflation should continue to make REITs a popular option for investors.

"I think it's hard to find a better inflation hedge than REITs in the public markets," Craig said.

In terms of sectors, Craig said he remains bullish on apartment REITs. He said he doesn't share the view that share prices already account for the positive outlook for the sector's fundamentals.

By Carisa Chappell