Paul Adornato, managing director with BMO Capital Markets, joined REIT.com for a video interview in Chicago at REITWeek 2013: NAREIT’s Investor Forum.
Adornato discussed the implications of recovering commercial real estate prices for REITs and whether or not he believes REITs are fairly valued.
“First of all, for those REITs that are looking to sell properties, they have had a pretty good time of it,” he said. “They’ve been able to sell whatever assets that they want to sell and have also been able to get pretty good pricing for those assets.”
On the flip side, he said companies that are active acquirers are finding that cap rates are becoming compressed and that valuations, in some cases, “are getting a little bit frothy.” However, he said the counterargument to that is that the cost of capital that REITs enjoyed has been somewhat competitive, so their rates are coming down.
When it comes to being fairly valued, Adornato explained that he was concerned about REIT stock prices prior to the recent market correction. However, he has become more comfortable with valuations in recent weeks. Adornato noted that common valuation metrics, such as the premium on net asset value and multiples on adjusted funds from operations (AFFO), were nearing “peak valuations” leading up to the correction.
“So we were becoming concerned that REIT stock prices were getting ahead of fundamentals. Then, in the last few weeks, of course, the REIT stock prices have corrected, taking a little bit of the heat out of the REIT market,” he said.
Looking ahead, Adornato said he’s keeping a close eye on which REITs have pricing power and are acting on it by actually raising rents.
“When we talk to some companies, there’s a little bit of timidness, if you will,” he said. They are a little bit shy about raising rents. Others seem to be a little bit more aggressively positioned. I think this might differentiate the companies in an environment that’s otherwise pretty good for all operators.”