Earlier this month, nine MSRE and MBA students, Daphne Ding, Zach Hohl, Janay Hull, John Kujawski, Connor Stickels, Will Zordani, Margeaux Wysockey, Hwajun (Jun) Lee, and Harrison Addy, from the AREIT program traveled to San Francisco for the NAREIT REITWorld Conference. The conference allowed the students to meet with REIT management teams, large investors, and buy/sell-side analysts through private meetings with the management teams of REITS in each of the student analysts’ respective sectors.
The AREIT students met with over 60 REITS, such as Prologis, VICI, American Homes 4 Rent, Host Hotels, and many more. In these meetings, students and analysts discussed the historical operating results, business plans, forecasts, and new investment opportunities with each of the companies. Aside from a tremendous networking opportunity, these meetings will help guide future stock selections for the AREIT teams and portfolio management decisions in the spring. AREIT teams have until the end of December to fully populate their portfolio with at least 30 different stocks with the goal of beating the MSCI REIT index.
Many REITs have had strong years with record revenues and occupancy rates but key discussion trends from the conference revolved around interest rates and the economy. With the federal funds rate swiftly increasing since earlier this year, the cost of capital for REITs has shifted, making many acquisitions no longer accretive to value, causing many to pause their acquisition and development pipelines. Investors price in future expectations, especially regarding recession fears and large bid-ask spreads, which has resulted in an average decline in equity values of about 25% year to date. These declines have shifted companies to trade at a discount to net asset value (NAV), which challenges the ways companies raise capital and grow their portfolios. The juxtaposition between strong operating fundamentals and weakening stock prices has created a challenge for REITs and has made many firms shift to more defensive strategies for the short term. A key component of these defensive strategies is managing balance sheets to offload expensive floating-rate debt, secure funds for any debt maturing in the next couple of years, and responsibly manage expenses in the inflationary environment. Current operating fundamentals are strong, but many companies expressed concerns regarding headwinds to much of the growth they forecast next year. Additionally, many management teams emphasized that there are still large bid-ask spreads in the market, so they are inclined to wait until prices fall before ramping up acquisitions. Despite heightened caution today, the management teams have optimism regarding increased transaction activity in 2023 once there is more clarity regarding inflation, the state of the economy, and when interest rate hikes will top out.
Aside from the conference, students planned several networking events with Graaskamp and AREIT Board members, local alumni, and industry leaders.
We really appreciate David Toti at Colliers and Jeff Spector at Bank of America for generously hosting our students in their meetings!
Looking forward, the AREIT Red and White teams will present their picks and mid-year portfolio performance to the AREIT board at the end of January.