Published: 7 July 2005
Nearly half of the institutional respondents in a survey on listed US reits said the trusts weren’t forthcoming with enough information to value certain income streams, such as those from joint ventures or partnerships, compared to other business sectors.
Even so, 90% of the buy-side analysts & portfolio managers surveyed by Broadgate Consultants LLC said they’d increase or maintain their investments in publicly traded reits (real estate investment trusts) over the next 18 months.
Survey respondents included some of the largest pension & mutual funds in the US.
31% said the level of information they got on underlying assets wasn’t enough to develop an accurate valuation, and only half thought reit chief executives & their boards “really understand their investor base and what drives their share valuation”.
The concerns are badly timed for the sector, because only 10% of respondents thought reit shares were undervalued, while nearly 60% saw opportunity in direct participation in real estate investment through alternatives such as private equity firms & hedge funds.
Broadgate chief executive Thomas Franco said: “The good news is that there appears to be plenty of demand for reit company shares among sophisticated institutional buyers. However, institutional investors will be looking much more carefully at individual reits, their management teams, strategy, strengths & weaknesses. Those management teams that understand their investors & what is important to them are likely to win the most support, assuming the performance factors are equal.”
He added: “The expected growth of hedge fund & private equity investment in the sector would seem to indicate that there continue to be market inefficiencies to exploit, which explains, in part, the strong institutional appetite for reit shares.”
Comment: The surprise is that it’s taken these analysts that long to work out that they don’t get told too many useable numbers. The biggest reit, Equity Office Properties, gives a great amount of comparative detail, including yields & rental movements, and the big mall companies provide considerable comparative material, but the industry is otherwise notable for the absence of key value indicators. Transaction statements almost invariably focus on total price, not on performance.
What’s more worrying is that the Broadgate chief should say, after collating the concerns, that sophisticated institutional investors were still keen to throw their money at a sector they can’t value properly â€“ and that that’s good news.
I expected US reits to start falling over about 3 years ago as the sector moved into a downward cycle, but a government & treasury keen to maintain cashflow at the expense of the balance sheet (consumer spending versus rising national debt) have maintained economic euphoria. Nevertheless, there have been some signs of rationalisation through large portfolio transactions, a subtler acknowledgement of easing which seems not to have been widely recognised.