40 Year Veteran of Financial Sector Analysis Sees REITs as a Potential Hedge for Rising Interest Rates: A Wall Street Transcript Interview with Thomas S. Mitchell, Senior Analyst at Miller Tabak + Co., LLC

Wall Street Transcript

67 WALL STREET, New York - November 6, 2013 - The Wall Street Transcript has just published its REITs Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Pricing Power Outlook - Acquisition and Financing Costs - Apartment, Lodging, Self-Storage and Office REITs - Consolidation Activity - REIT Access to Capital

Companies include: Walgreen Co. (WAG), Realty Income Corp. (O), Avalonbay Communities Inc. (AVB), Equity Residential (EQR), Home Properties Inc. (HME) and many others.

In the following excerpt from the REITs Report, Tom Mitchell, an expert in financial sector analysis for over 40 years, discusses his outlook for the real estate finance and his top stock picks:

...for 11 or 12 years, since the early 2000s, we think almost the whole REIT sector has tended to trade on net asset value, as opposed to dividend yield or some other combination that would throw it into direct competition with, say, utility stocks. Generally speaking, the analysts and investors who followed the net asset value, rather than focus on valuation parameters, were the ones who made the most money and did not miss potential profits.

What's very interesting is this period where, if we're going to get higher long-term interest rates, we ought - emphasis on ought - to have an economy where occupancies are rising for office and retail and other sectors of the REIT market and rents should be moving up, even though interest rates present a headwind in another way.

If that happens, we might well see a repeat of essentially what happened in the late 1970s and early 1980s, where commercial real estate actually kept pace, in a combination of current yield plus price appreciation, with the extraordinarily high interest rates we had. In theory, commercial real estate should be an excellent inflation hedge, and therefore REIT stocks should be able to perform well in a rising interest rate environment, assuming that the economy is moving along with those interest rates.

I think that over the next 18 months or so, that is the biggest question I have, whether the paradigm of stocks following net asset value tied more to rents and higher occupancies within a band of higher interest rates will come through the way that it did in 1981, 1982. Or will it be more that we see a reversion to the stocks trading essentially as if they were bond substitutes, which for many, many years was the paradigm. I think that roughly between 1984 and the early 2000s, that was the paradigm. So as an analyst looking to find a very large-scale critical variable, how investors treat these stocks if interest rates keep moving up by 100 basis points a year, I think that's an open question. I remind myself I have to keep an open mind, that the paradigm for the industry may shift again...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Rates

View Comments (0)