Beyond the Build


REIT Pricing and Experience from the Road

Mike Prior recently retired from a career managing a real estate portfolio which at times was in excess of $5 billion. He now works as a consultant, officing with us. It’s been great having this kind of experience under our roof. Mike has been a big help on our financial side and with our customers.

This week, one of our customers asked him a few questions about REIT’s pricing of their money. Here are Mike’s thoughts on that question, beyond boots on the ground market influences:

  • Alternative investment opportunities such as bonds are yielding on average around 3% right now. If one was buying a common stock, there would probably be a dividend rate between 1% and 2%, plus appreciation.
  • Most pension funds are using an all-in expected return of about 7% for their stock portfolio. A mortgage REIT is lending money in the 4% to 5% range. If I were a REIT and was competing for investment dollars in the common stock market, I would consider that the return “bar” is relatively low from a competitive standpoint. I would imagine they assume that they can buy in the mid to low 8% range and sell in the mid 6% range.
  • A REIT’s yield during the holding period beats most of the above mentioned alternatives. The flaw in the REIT thought process is that as rates rise–which I expect to happen given the situation with The Fed–their portfolio values drop significantly. The problem with my argument is they will worry about rising rates when it happens.
  • The final factor revolves around the amount of capital that is looking to be safely invested in today’s financial markets. There is far more money available for real estate than quality real estate product.

To me, the wisdom of Mike’s experience combined with energy and youth that really listens is very powerful. This pairing helps the whole become greater than the sum of its parts.

Merrill Stewart Jr.

Merrill Stewart is Founder and CEO of The Stewart/Perry Company, a commercial building contractor based in Birmingham.