Nareit's REIT Report Podcast

David Veal, chief investment officer for the City of Austin Employee’s Retirement System (COAERS), joined guest host Meredith Despins, Nareit senior vice president, investment affairs, for a special edition of the REIT Report to discuss how investing in a completion portfolio using REITs is delivering value to the pension system’s real estate investment portfolio.Pension funds have long recognized the important role real estate plays in diversified investment portfolios. However, over the past 20 years, the real estate economy has expanded beyond the property sectors institutional investors have traditionally invested in—like retail, office, residential, or industrial. Today’s REIT industry reflects that evolution and offers investors access to a diversity of property types, including the new economy property sectors like infrastructure, cell towers, data centers, and networked logistics properties that house the growing digital economy. This rise of 21st century real estate has prompted institutional investors—such as COAERS—to adopt a portfolio completion strategy. A portfolio completion strategy is a tool investors have to invest in property sectors, including new economy sectors, that complement the traditional real estate property types in order to achieve more robust diversification, boost portfolio investment returns, and dampen volatility.

STORE Capital Corp. (NYSE: STOR) President and COO Mary Fedewa says that after six years as a public company, the net lease REIT has “barely scratched the surface” in terms of tapping potential opportunities for growth.Speaking on the REIT Report, Fedewa said STORE continues to see trends “driving more net lease activity, as companies recognize the benefit of using their own capital to grow their business rather than to hold real estate.”Fedewa said that with over 200,000 companies within its target market, STORE sees plenty of runway for growth. “Opportunity is so large that it allows us to be highly selective and to focus on investment opportunities that are accretive to our shareholders, regardless of market conditions,” she noted.

REIT share prices, buoyed by positive developments with regard to progress on a COVID-19 vaccine, ended last week at their highest levels since the start of the pandemic, according to Nareit Senior Economist Calvin Schnure.Speaking Nov. 16 on the REIT Report, Schnure noted that news that Pfizer trials showed a success rate of 90% sent REITs sharply higher, especially for those sectors most impacted by the pandemic.Lodging and resort REITs were up 31% on Nov. 9 alone, while retail REITs were up nearly 20%. REITs closed out the week at the highest Friday close since March 6.

The DLA Piper annual survey of real estate executives cites the availability of capital looking to invest in commercial real estate as a reason for optimism in the current environment.Speaking on the REIT Report, John Sullivan, U.S. chair and global co-chair of DLA Piper’s real estate practice, said “the fact that there are folks out there with money to invest—and actually we’re seeing some increases now in investment—is a reason for some optimism.”The survey showed 58% of respondents citing an abundance of available investment capital as the top reason for an optimistic economic outlook, an increase of 15 percentage points from the 2019 survey. Sullivan pointed to recent estimates of around $400 billion in available institutional capital looking to invest in commercial real estate.

Gaming REITs whose tenants are investing in online gaming (iGaming) platforms are expected to benefit from increased downside protection, according to Spenser Allaway, an analyst on Green Street’s research team and sector head of net lease, gaming, and self-storage.Speaking on the REIT Report, Allaway said downside protection for the gaming REITs will be in the form of improved underlying tenant credit.The three primary gaming REIT tenants are: Penn National Gaming, a tenant of Gaming and Leisure Properties, Inc. (Nasdaq: GLPI); Caesars Entertainment, the operator for VICI Properties Inc. (NYSE: VICI); and MGM Resorts, a key tenant of MGM Growth Properties LLC (NYSE: MGP).“All of these tenants have made sizeable investments to establish an online presence,” Allaway said.

Third-quarter GDP posted the biggest increase in history as it rebounded from a record decline in the Spring, yet it still remains below levels seen a year earlier, indicating that further improvement is needed, said Nareit Senior Economist Calvin Schnure.Speaking on the REIT Report, Schnure noted that even after the 33% increase, third quarter GDP is “still down by as much as you might see in a typical recession, so we still have a ways to go.”As for which areas showed growth, Schnure pointed to spending on goods, particularly items that can be used at home. In fact, total durable goods spending is 12.7% higher than a year earlier, Schnure said.

Retail sales figures for September came in stronger than expected, laying the groundwork for a potentially robust holiday sales season this year, according to Nareit Senior Economist Calvin Schnure.September retail sales jumped nearly 2%, which was stronger than expected. “The economy’s not as weak as some people may have feared a month or two ago,” Schnure said.Nearly all categories of spending are running at about 5% above pre-pandemic levels, although a few notable exceptions include gasoline, restaurants, and clothing and accessories, Schnure said. The overall gains mean that “we could well see a surprisingly robust holiday sales season,” he noted.

Current volatility within the REIT market is creating the potential for opportunistic investment, particularly among well-capitalized companies with seasoned management teams, said Jay Olander, managing partner of Cornerstone Realty Advisors.Olander has served in senior REIT management positions for over 25 years. Most recently, he oversaw the $1.9 billion sale in 2016 of Landmark Apartment Trust, Inc., an apartment REIT.Speaking on the REIT Report, Olander compared current market conditions to those of previous cycles, concluding that “over time, we do expect that the investment market will return, just as we’ve seen in the past.”

A slowing of payroll employment in September raises concerns over the pace of the economic recovery in the months ahead, Nareit Senior Economist Calvin Schnure said.Speaking Oct. 5 on the REIT Report, Schnure noted that despite the 661,000 rise in payroll employment in September, “the report had more warning signs than good news.”The increase came in below market expectations, and while the unemployment rate dropped to 7.9%, a big part of that was because people stopped looking for jobs—especially women and minorities.

The biggest story to emerge from the past six months has been the bounce-back in certain retail sectors. Funari noted that rent collection for free standing retail started out at 73% and by September was almost at 95% of typical rent collected. Shopping centers started the pandemic at slightly over 50% and were at 82% of typical rent collection by September, she noted.Nareit decided to end its regularly scheduled rent collection survey this month, Funari explained, because most property sectors had stabilized by July and the remaining sectors seemed to be heading in that direction through September.Furthermore, rent collection is only one piece of REIT operations, Funari said. “It says a lot about tenant health, which was useful information, especially early in the pandemic, but as we’ve stabilized over time, we’re just not learning new information about the REITs themselves.”