J. Scott Craig, vice president and portfolio manager at Eaton Vance Management, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.
Craig discussed ways in which his background as a certified public accountant influences his approach to investing.
“It’s very easy to take accounting for granted and to assume everything is fine,” Craig said. He added that he has now started to have conversations with companies regarding their systems of checks and balances in accounting.
“I hope that’s a conversation that’s going on in every one of the REITs that we’re invested in,” Craig said.
Craig also said that while REITs have done well in terms of structuring their debt since the financial crisis, he has lingering concerns about their balance sheets.
“We see a lot less risk of a liquidity crisis than we did before. I think where REITs haven’t done as good a job is keeping the leverage low. We continue to see leverage drift up a little bit, and very few REITs have sufficient dry powder to really be aggressive if we have another crisis or disconnect of some sort,” Craig observed.
Meanwhile, Craig commented on the impact of construction costs on existing assets.
“On the upside, one of the greatest real estate opportunities you can ever see is the ability to buy assets at a big discount to replacement cost,” he said. “We saw a good bit of that over the two to three years and we see a lot less of that today.”
On the other hand, if construction costs are well above the long-term inflation trend line, that can be a sign of the market overheating. “I don’t see any reason to be concerned there, but it is something that bears watching,” Craig said.