Despite recent struggles, industry insiders view REITs as a great inflation hedge
Real estate is typically considered of as an excellent inflation hedge, but in today's market, REIT trading prices have declined by almost 20%. Still, industry experts remain confident in the asset class.
At a recent roundtable discussion, Middlefield president and CEO Dean Orrico asked industry experts if investors will see a recovery after the recent challenges in the REIT space.
“I firmly believe investors will be vindicated,” said Kevin Gorrie, president and CEO of Granite Real Estate Investment Trust. “There’s a valid concern about the rise in the cost of borrowing, but we are not a highly leveraged buyer. While a lot of private equity firms leverage at 75%, we finished the second quarter at just under 28%.”
Gorrie maintained that the fundamentals—a sound balance sheet that supports dividend growth and cash flow—are the greatest way to make an assessment in an inflationary market, even though that aspect of the equation is frequently disregarded.
Mark Kenney, president and CEO of CAPREIT, further pointed out that in the case of residential structures, the emphasis has been on yield expansion. He urged investors to undertake their own research into NAV methodologies, noting that different management companies use various methodologies for their calculations.
The recent changes in interest rates have also had positive and negative implications. When a company’s balance sheet includes some form of debt, it can be a drag on cashflow. However, it also has an effect on valuations.
“We are in a very fortunate position in the apartment space to have guaranteed renewal of CMHC debt financing,” said Kenney. “We’re not exposed to the debt market; we’re exposed to the cost of debt. We are extremely low leverage for the asset class.”
The full coverage of the roundtable, viewed in an interactive digital format, can be viewed here.
