Billy Wright is a managing director with Wells Fargo’s Real Estate, Gaming, Lodging, and Leisure (REGAL) Group. He has been involved in strategic transactions and public and private debt and equity financings for both public REITs and private real estate companies for more than 15 years.
What is the state of the capital markets for REITs in early 2020?
The market has been very liquid, although there are certainly some sectors trading at discounts to net asset value (NAV) where capital raising has been a little bit more challenging. I think we are going to continue to see REITs raise equity capital as long as they continue to trade at current levels and either at parity or a premium to NAV. It’s also been extremely robust on the debt financing side as we saw REITs lock in historically low borrowing rates at record levels. The bank market, CMBS market, and high-yield market are also extremely liquid, open, and available as well.
How are REITs helping improve their balance sheets?
Overall, REIT balance sheets continue to be about as well-positioned at this point in the cycle as we’ve ever seen. REIT management teams are being very proactive, and have been throughout this cycle, in terms of keeping their leverage down and continuing to focus on extending the duration of their debt maturities given the attractive debt financing markets.
Companies are also using ATM equity programs to match fund development pipelines, which has also helped to keep leverage from creeping up due to development. Will we continue to see a disconnect between public and private valuations?
The disconnect that we’ve seen at various times has a tendency to converge over time. We’re going to continue to see some disconnects that are sector specific. Generally, low interest rates are going to continue to buoy stocks that have underperformed. To the extent that there’s a liquid property market behind it, I think that the disconnect will, over time, correct itself.
Could this translate into more M&A activity?
There’s so much capital on the sidelines that would love nothing more than to get deployed. Consistent with the last few years, I think we will continue to see a few privatizations and public M&A transactions this year.
If you look at the overall size of the sectors, that can be predictive of what is to come. For example, the multifamily sector has consolidated quite a bit and what you see there are companies that are large and efficient from an operations standpoint. Other sectors have up to 20 companies. As those companies compete for capital and investor attention, we could see a number of them consolidate. I believe we could also see activity in those sectors that are disadvantaged from a capital standpoint and are trading below net asset value.