Jeremy Anagnos has more than 20 years of investment management experience. He is a managing director and a senior global portfolio manager with CBRE Clarion Securities. Prior to joining CBRE Clarion Securities in 2011, he served as co-CIO of CBRE Global Investors’ securities team responsible for portfolio management of global real estate securities separate accounts and funds. During his career, Anagnos has worked in various management and research positions in the real estate securities industry with LaSalle Investment Management and Deutsche Bank. Anagnos, who will be speaking at IREI’s upcoming Infrastructure Strategies conference, recently spoke with IREI’s John Hunt about infrastructure securities.
Real estate shares many commonalities with infrastructure. Studies have shown that listed real estate is a proxy for direct real estate over the long term. Can the same case be made for the relationship between listed and direct infrastructure?
The listed real estate market has become a more mature asset class, with broad acceptance across investor groups of its merits as a proxy for the real estate asset class. Both the listed and direct real estate market have well-regarded and well-defined indices that enable investors to analyze historical data and arrive at the conclusion regarding the profile of returns and their long-term similarity. Infrastructure is still a relatively new asset class that lacks readily accessible data, and in many cases is not consistently defined. However, we have done an analysis of the available data and made assumptions about the infrastructure market and have found that indeed listed infrastructure offers similar returns to direct infrastructure over long-term periods. When investors consider the holding period of their investment, which for infrastructure is typically greater than five to seven years, then listed infrastructure is a very good alternative.
What role should listed infrastructure play in an institutional allocation to the asset class?
Again, we see many similarities to real estate in how listed real estate was initially introduced into allocations over 15 years ago. Investors added listed real estate as a complement to their direct real estate allocation to improve liquidity, increase or decrease tactical allocations, or to gain access to sectors dominated by the listed sector — all of which apply to listed infrastructure. We also see some investors with less resources and familiarity with the direct infrastructure market seeking out listed infrastructure as a way to gain exposure and learn more about the market.
Unique to listed infrastructure that we did not see in real estate is that some investors are choosing listed infrastructure due to the incredibly competitive environment to bid for infrastructure assets, leading to long queues to enter established funds or excessive periods of investment for new funds. Infrastructure is not as liquid a transaction market as real estate, but in a listed market of over $3 trillion of equity there is always an ability to place capital into income-producing, core infrastructure assets.
Listed infrastructure has performed well the past few years, posting approximately 9 percent compounded annual returns since 2010. In light of this strong performance, has valuation become stretched?
We believe that investors are wary of valuations for two reasons: fear of rising interest rates and high prices being paid for direct infrastructure assets.
We all know that interest rates have declined around the globe the past few years. We can see that the EV/EBTIDA multiples have risen, and investors have been willing to pay a higher multiple for assets given lower interest rate costs. However, we would highlight that debt ratios for listed infrastructure companies are not high — around 30 percent debt/EV — so they are not aggressively fueling their earnings with debt. In addition, we would note that we forecast fairly consistent earnings and dividend growth of 6 percent to 8 percent during the next two years, in line with the past few years.
Second, institutional investors appear concerned about the aggressive bidding for core infrastructure assets leading to ever decreasing leveraged IRRs, at record low interest rate levels. Our analysis suggests the assets of listed infrastructure companies are valued more than 20 percent less than what the private market is paying. Given that the leverage of the listed market is roughly half of that used in the direct market, we feel there is a compelling valuation story in listed infrastructure.
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John Hunt is conference program manager of Institutional Real Estate, Inc.
