“REITs have actually strengthened their balance sheets,” Schnure says. “They have relied to a great extent on raising equity capital to fund their portfolios. And so their leverage ratios are the lowest we’ve seen in 20 years or more. They have also lengthened the maturity of their debt to about 75 months. So their debt is not going to be repricing in the near term. They’ve done everything they can to protect themselves against interest rate risk.”
Some sectors of the REIT industry are expected to outperform in 2019.
One area is the industrials and logistics space, where companies operate the facilities that receive and ship the goods bought on the internet to customers’ doorsteps.
“The Amazon effect has and will continue to create significant demand for industrial properties, and Prologis (PLD) is best of breed in this space,” says Patrick Healey, founder and president of Caliber Financial Partners in Jersey City, N.J. “They have an active development division as well, which should add some growth to this stabilized company.” Prologis currently trades at a price that offers a nearly 3% dividend yield.
Healey says Prologis “is sort of the exact opposite of regional malls,” which he calls “a very unfavorable property type for investment.”
Yet retail properties have done surprisingly well, counters Schnure. “They have fairly high occupancy rates, above 95%. When there are store bankruptcies or the tenant is leaving, they are able to find new tenants, and many times these new tenants are coming in with stronger sales, stronger cash flow and paying a higher rental rate. So these retail REITs have actually had very strong earnings performance. This is a sector that probably deserves a second look in 2019.”
Sam Adams, CEO and co-founder of Vert Asset Management in Sausalito, Calif., agrees. His company runs the Vert Global Sustainable Real Estate Fund (VGSRX), which invests in REITs with sustainability (ESG) credentials.
“Everyone knows consumers are shopping online more and at malls less, which has translated into poor stock performance for several retail REITs,” he says. “But some mall owners are taking advantage of this shift in shopping patterns to renovate and repurpose their properties.”
For example, Simon Property Group (SPG) plans to transform Seattle’s Northgate Mall into a multi-dimensional property, including apartments, shopping, an ice rink and other facilities. In Los Angeles, two developers have formed a joint venture to convert the Westside Pavilion into a “Class A urban creative office campus.” They recently signed Google to a large long-term lease.
Some investors think the best days are over for REITs owning residential apartment buildings and complexes. But Schnure says the sector “has very strong fundamentals.”