Reit Magazine - January/February 2021 - 49

different property sectors and
geographies.
Both you, on an
individual basis, and
your REIT team at Citi consistently rank in the top of
your field for REIT research
and analysis. What's the
secret to that success?
Teamwork. I know it is a bit
corny, but I believe our success
has been driven by our collective efforts. We work well as a
team with strong communication and partnership between
us, and we leverage each other's
strengths.

Q

The pandemic has
certainly shaken REIT
values. Has that created
buying opportunities for
investors? If so, which sectors look most attractive?
As landlords to the broader
economy, REIT stocks should
be able to recover lost ground
in 2021 as the world moves
past the current COVID-19
pandemic and begins a new
growth cycle.
While it is likely the current
impact of the pandemic, with
increasing restrictions and lockdowns, could negatively impact
near-term results and increase
trading volatility, we believe
investors are looking through
current operating weakness and
calibrating to future results and
the longer-term property sector
impacts from the pandemic.
Our positive bias on the REIT
sector is supported by: the
economic recovery; attractive
valuation to equities and fixed
income alternatives; improving
fundamentals versus a weak
2020; significant private capital
on the sidelines; a continued
low interest rate environment;
wide access to well-priced capital across the capital stack; and

Q

above-average
dividend yields.
The key risks in our
call relate to macro
variables. The most
significant of these is
COVID-19, where we
could see a slower-than-expected vaccine rollout and a
lack of effectiveness controlling
the virus, which could lead to a
deeper economic trough, and
hence, an impact on landlord
cash flows and asset values. In
addition, political uncertainty,
regulatory impacts, and deficit
concerns remain key risks.
How do dividends
factor into your
thinking about 2021?
Another catalyst for REIT
shares is the potential for
dividend upside, alongside
the earnings recovery. While
REIT dividends are below
historical averages as a number
of companies within the more
impacted sectors reduced or
suspended their dividends, we
see the prospect of reinstated
dividends in 2021, which could
help spur additional income
growth and returns.
Payout ratios remain below
historical averages, providing
the opportunity for dividends
to grow alongside cash flow.
On the earnings growth front,
we estimate AFFO is expected
to decrease about 1% in 2020
(excluding the lodging REITs),
while earnings are expected
to recover in 2021 with AFFO
growth of around 5.5%, and
then grow of approximately 8%
in 2022.
This growth is being driven
by a recovery in operating
fundamentals, external growth
activities, re-financing of
capital, and the retention of free
cash flow. Investment activity
is expected to continue to pick

Q

How well do you think the REIT
sector was positioned to handle
the challenges of the economic
crisis and business disruption
caused by the pandemic?
While no one was fully prepared to face the unprecedented challenges and disruption caused by the
pandemic, we believe the REIT sector was in the
best position it could have been heading into the
pandemic.
In fact, both sides of REIT balance sheets were in
a good spot with the left side (the assets) benefiting
from significant portfolio repositioning over the last
10 years, and the right side (debt and equity) benefiting from deleveraging and a significant amount
of debt refinancing, which had extended durations,
lowered rates, and laddered maturities. REITs also
benefitted from ample near-term liquidity, limited
near-term maturities, and high tenant credit with
above-average quality portfolios.

up next year, and combined
with prolonged reduced interest
rates, help support our positive
return outlook.
Clearly, some sectors
have been more
severely impacted than
others during the pandemic. What's your outlook
for the hospitality and
retail real estate REITs
specifically?
Despite the significant impact
from the pandemic, we believe
the lodging space stands at the
beginning of a multi-year recovery as operating results improve
with better demand trends, limited supply growth, and leaner
operating models. While timing
remains fluid, largely driven

Q

by timing and acceptance of
vaccines, we believe the outlook
continues to improve as we
move through 2021. That said,
we anticipate a bumpy road on
the way to recovery.
On the retail side, we favor
open-air/essential retail and the
capital positioning of shopping
centers in this environment over
enclosed regional malls-an
area where we expect operating
and capital positions to remain
strained.
On the mall side, we continue
to believe the mall sector will be
disproportionately negatively
impacted by the pandemic
given near-term concerns
around rent payment, tenant
fallout, liquidity risk, and
rent roll down. While we feel



Reit Magazine - January/February 2021

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Reit Magazine - January/February 2021 - Contents
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