In the 1967 film “The Graduate,” the one word of career advice offered to Dustin Hoffman’s character was “plastics.”
But if the film were updated, today’s advice just might be “prisons.”
Or “cell towers.” Or “casinos.”
Those are three new property sectors being aggregated into investment pools known as REITs, or real estate investment trusts.
But they’re not typical.
The biggest sectors include things like malls, office buildings, apartments, hotels and hospitals.
REITs are stocks in which investors own shares of commercial real estate portfolios. And buying REITs, says Newport Beach real estate guru Mike Kirby, is a very good way for average folks to get a piece of the commercial real estate action without the headaches or the difficulty in selling.
Kirby should know. For 30 years the South Dakota native has been at the helm of Green Street Advisors, a Newport Beach research company specializing in REITs.
When Kirby and former partner Jon Fosheim founded Green Street in 1985, the sector was a niche market of 37 REITs representing about $3.3 billion in assets, according to the National Association of REITs.
Since then, the number has mushroomed to 179 REITs worth about $904 billion.
Green Street also has grown – from its two original owners to more than 100 employees.
Currently, 15 percent of all commercial real estate is owned by REITs, Kirby said.
Publicly traded REITs own most U.S. malls, with stock value totaling $114 billion, according to Green Street. The stock value is $110 billion for REIT-owned apartments and $95 billion for REIT-owned offices.
Kirby advocates that all investors should have at least 5-10 percent of their investments in REITs, which have had an average return of 11 percent annually for the past 30 years.
“To me, it’s a no-brainer, because I’m able to get a massive amount of diversity, which obviously greatly lessens the risk,” Kirby said. “I’m also able to gain access to the best operators of real estate in this country. I’m able to do it at a very low cost.”
Green Street, which has offices in Newport Beach, Dallas and London, caters mainly to professional investors such as mutual fund managers, pension fund managers and endowments.
Unlike other commercial real estate researchers, Green Street specializes in REITs, providing “a deep dive” into 85 North American REITs and 33 in Europe, the company said.
“Brokers like Merrill Lynch, Citi and many others have REIT research teams that are very good as well,” said Bruce Garrison, the senior REIT manager for Chilton Capital Management in Houston.
“However, all of these firms are also looking for investment banking business. Green Street offers clients like ourselves a pure product with no conflicts,” Garrison said.
Recently, Green Street has branched into consulting and providing commercial real estate analysis for the non-REIT world, which is 85 percent of commercial property owners.
The company’s insight about publicly traded properties “by and large gives you a pretty good idea of what’s going on with private companies,” Kirby said. “So there’s a growth area for us.”
That potential growth likely is a key reason behind private equity company Golden Gate Capital’s decision to buy a majority stake in the employee-owned company last year. The deal closed in December, leaving Golden Gate with a two-thirds interest, Kirby said.
In a recent interview from his office near Fashion Island, Kirby, 54, shared his understanding about this corner of the real estate world. Here are excerpts:
Q. How does one pick REITs to invest in?
A. I would strongly recommend doing it through a mutual fund. Active management has worked in this space over the long run.
Quite frankly, there’s a lot of index product that have worked very well, too.
Q. Such as?
A. Vanguard has a massive index fund that specializes in this space. ETFs (exchange traded funds) specialize in the REIT space, and those are certainly viable ways to get exposure too.
The important point is that people should have exposure to this space. It’s daunting and probably foolhardy to try to do it on your own.
The commercial real estate asset class is maybe $9 trillion, which puts it in order of magnitude nearly half as big as the entire stock market. And so a portfolio that doesn’t have exposure to that asset class is not a well-constructed portfolio.
Q. How are REITs doing right now?
A. This year, they’re about flat. They’ve had a tremendous run. The market cap has increased hugely, in large part because total returns have been so good ever since the financial crisis.
They got hit very hard during the financial crisis. They went down more than 70 percent, and subsequently regained the vast majority of that. REIT prices aren’t quite back up to their all-time high yet, but they’re pretty close.
Q. You said earlier that REITs’ value increased by at least $750 billion in four years. How did that happen?
A. Mostly, it was a price rebound from what we now know to be an overreaction to the financial crisis. At the time, we all thought the world might be ending. And so the prices of everything, whether it’s common stocks or commercial real estate, went to lows that hindsight shows (were unwarranted).
But there have been other factors at work. We’ve had a tremendous amount of activity on two fronts. One is nonlisted real estate companies becoming public. Companies that weren’t publicly traded are either doing IPOs or they’re just real estate companies that listed themselves.
And we’ve also had a tremendous amount of activity with nontraditional owners of real estate using the REIT structure in some creative way, shape or form to create a new REIT.
Things like prison owners, gaming companies, cell tower owners. Property sectors that, when you think about it, you say, I suppose that’s real estate, but traditionally they have not been part of the REIT mainstream.
Q. What sectors should investors be looking at?
A. There’s some property types that we believe will perform better over a very long holding period.
The common trait they share is that they require very little capital expenditure over the long run to keep them up and running.
Suburban office is a high-cap ex (capital expenditure) property type. Hotels are a high-cap ex property type. You need to spend a lot of capital to keep your properties competitive.
At the opposite end of the spectrum, you have some property sectors that have very low-cap ex. Self-storage. Manufactured housing. Among the bigger property sectors, apartments. Those are low-cap ex sectors, and they tend to outperform over a very long time frame.
Q. What’s the outlook for real estate and REITs?
A. The outlook for property continues to be very good. Fundamentals are solid across the board.
The thing that’s really unique about this real estate cycle is how little construction there is. That’s really good for property owners across the country. So you’re not seeing the oversupply that normally spells the end to a cycle.
The biggest risk we face for both property investors and REIT investors is the possibility that interest rates could spike higher. We don’t get too concerned about a moderate increase in interest rates.
But if by chance interest rates spiked by 100 or 200 basis points, that would not be good news for property values or for REIT share prices.
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Original Article Here: OC Metro: REITs offer investors a toehold in real estate