Browse Tag: Real estate investment trust

Ventas Healthcare REIT CEO Debra Cafaro

REIT.com’s latest video touches on the topic of the entire medical properties market by way of a chat with Debra Cafaro, CEO of the medical properties REIT Ventas (VTR).  Ventas is a major player in medical properties from hospitals to senior care and from national to international markets, working, as do all REITs in the sector, as a channel for Medicare payments to be transformed into dividends distributed to shareholders. Cafaro says of the healthcare market that a mere 15% of US healthcare properties are present in REIT portfolios, but if she and her competitors have anything to do with it, the acquisitions will only pick up steam as time goes on.

 

Commercial Real Estate News Roundup: January 9, 2014

A building under construction in downtown San ...

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Office
Industrial
Retail

Multifamily

Land

 

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Investing in REITs: The What And The Why From NPR

The purpose and the process of investing in a real estate investment trust (REIT) is unclear to many, even though it’s the most cut-and-dried way to put capital into commercial real estate.  Some struggle with understanding the notions of portfolio management, and questions about what properties are being invested in and why keep an investor from making the leap.  Others wonder about returns: how do rents and other building cash flows become dividends or push the REIT share price in one direction or another?

The personal perspective on these aspects of REITs is not often explored by mainstream media, and when it happens, it’s worth checking out. National Public Radio’s Uri Berliner recently produced an excellent program on the REIT scene by letting us follow along with his journey as an investor.

At times both enlightening and worrying, Uri’s piece explores the basic financial plumbing behind the REIT concept and sets REITs up in comparison to other means of real estate investment in a compelling way.  The worrying part: the reappearance of the “B” word: bubble.

Josh Dorkin runs a real estate investment website called Bigger Pockets. I asked him what kind of real estate bet I can make for $1,000. His advice: Be careful.

“We’re kind of in a bubble once again,” he says. “We’ve got these low interest rates; we’ve got the big money funds coming into the market. And of course if you’re savvy and know what you’re doing, there’s always going to be an opportunity.”

Dorkin runs me through my options.

“You could go and flip a house. Of course, you’d need to go out and take out a high-risk loan more likely than not to do that and of course doing that is really kind of like running a job in itself.”

Scratch that.

“Other options include crowdsourcing or syndication.”

Too complicated.

“And I think the final option is really to go out and buy shares of a REIT — real estate investment trust.”

REITs are sold like stocks, and they’re held by many individuals and institutional investors. You might have a REIT in your retirement fund. REITs are trusts that own and develop property and earn rental income. Most of it gets passed on to investors.

“They are forced by law — a law created in 1960 — that provides that real estate investment trusts have to meet certain tests,” says Brad Thomas, editor of the Intelligent REIT Investor. “And if they do, they are forced to pay out 90 percent of their taxable income in the form of dividends.”

Those dividends are a regular stream of income, and they’re what make REITs attractive to investors. In a rising real estate market, they’re what clinch it for me.

I put down $513.94 on a REIT index fund. It’s basically a smorgasbord of many different REITs. It contains what you might expect — REITs that own apartment buildings and shopping centers. But Thomas says the range of REITs today goes far beyond that, “from billboards to prisons to cell towers, campus housing. Even solar is on the horizon potentially.”

With so many kinds of businesses seeking to become REITs, the Internal Revenue Service has begun reviewing some conversion applications to determine whether the companies truly qualify as real estate firms. In other words, are they really landlords? The REIT structure can allow companies to significantly reduce their tax bills. The fund I’ve bought only includes existing REITs, not firms hoping to convert to them.

 

To hear the entire NPR program How To Invest In Real Estate Without Being A Landlord, follow the link.

 

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The Odd Story Of Finance In The Senior Living Sector

Sunrise Senior Living - Church Road, Edgbaston...
Sunrise Senior Living (Photo credit: Ell Brown)

The senior living sector is a major growth area in commercial real estate. The reasons for this boil down to classic supply and demand driven by demographics. Longer life expectancy in the United States mean steady growth in age cohorts that move into senior living facilities.   The over-85 segment of the population is growing at three times the rest of the population.  In 25 years, it is set to double. Further, a great number of existing facilities are older product, so new unit development is being spurred in most markets.

REITS stepping up

This population growth meeting a 7% penetration rate  – the rate at which seniors become residents in senior living facilities – means the requirement over the next 15 years is to build 375,000 new units of assisted living and senior living facilities.  This requirement comes with a $57 billion capital cost.  Yet the investment dollars for this sector have not come from mainstream sources.  Financing of projects and acquiring equity has until recently been largely the domain of local banks, producing a highly fragmented and some would say eccentric financing picture.  Only recently has the REIT industry stepped up its acquisitions in the senior living space.  Speaking at the recent Real Estate Journal Senior Living Conference in Chicago, Manisha Bathija, Senior Investment Officer of Ventas, a REIT working the senior living space, said the portfolio she leads has picked up $18 billion in senior living property acquisitions the last 10  years and expects to continue the trend.

REITs are only one of the classic capital sources in our industry.  What about pension funds and insurance companies?  Here’s where it gets odd, and suggests a greater change.

The Missing Usual Suspects

Speaking at the conference, Jacob Gehl, VP Investments of MArcus & Millichap pointed out a surprising observation: Even though insurance giants once financed this space decades ago, in his experience, insurance companies and pension funds today “don’t like to invest in anything with a bed in it”.   Why the shyness around senior living and multifamily?  Because one aspect of ownership of such properties is evictions, and pensions and insurance companies are in the business of paying out to millions of beneficiaries.  There is a perception of a potential public relations disaster for a pension who is on one hand financially supporting a pensioner, and on the other hand, kicking that pensioner — their own beneficiary — out of his or her apartment.  Therein lies an institutional bias, one that may take some work to overcome.

Operations vs. Equity

Similar to hospitality properties of all kinds, the business of senior living property ownership is a mix of equity and operations.  It’s operations that drive performance, particularly in properties where cost controls and rent caps associated with government affordability programs are part of the picture.  If there was a theme at the conference, it was a reverence for skilled operators of senior living facilities, as they hold the key to performance.

 

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Charter Schools: Commercial Property Lessons Learned

classroom
(Photo credit: cayoup)

The marketization of public education is a trend gaining traction across the country. Commercial real estate transactions and investments in the charter school space are following suit.  What happens when expert commercial real estate investors take on the task of displacing the public interest in education with shareholder interest?

In at least one case, some tough business lessons were learned.

A.D. Pruitt’s piece in the Wall Street Journal tells the cautionary tale of one expert in commercial real estate and its foray into charter school property deals. Entertainment Properties Trust is a movie-theater REIT owning 112 theaters in 35 states.  Entertainment Properties got into the charter school building market, adding 37 charter school properties to its portfolio n exhange for about $72 million.  Most of these schools are operated by a for-profit charter-school operator.  The outcome?  Vacant buildings, lost contracts, and most sadly, poorly served kids.

But the investment into charter schools has gotten bad marks of late. In the past few months, [for-profit school operator] Imagine lost its contracts to manage seven schools in Missouri and two in Georgia due to criticism about poor test scores and financial mismanagement. Those schools were owned by Entertainment Properties, which was then in a pinch to fill the vacant buildings.

Those nine schools represent a $72 million investment for Entertainment Properties and one-third of the number of leases the company has signed with Imagine, which currently operates about 75 schools nationwide.

The turn of events has revived concerns among investors that Entertainment Properties is veering too far from its expertise in the theater business.

“I think the Street is going to be a little hard on the stock” until the company resolves the issues that it faces with Imagine, said Rich Moore, an analyst at RBC Capital Markets.

Indeed, since the Missouri Department of Elementary and Secondary Education revoked the charter for Imagine Schools in St. Louis in mid-April, Entertainment Properties’ stock has declined 12.9%, while the broader REIT market is basically flat.

The story’s about more than one commercial property portfolio’s setback while moving to profit from the marketization of public education.  Entertainment Properties isn’t taking its ball and going home; CEO David Brain sees “an increasingly favorable political climate for alternative education,” and expects to continue its foray into charter school property.

The wider story is about fundamental changes in communities.  The United States was the world pioneer in mass education, first in primary education in the 19th century, then secondary in the 20th.  The resulting enormous power of the country’s economy speaks directly to that commitment to public education. Competition, profit and private interest were not drivers of that commitment; access and society-wide insistence on quality education were.

While it’s not clear that charging rent to school boards will improve educational outcomes; it is clear that the marketization of primary education presents risks to CRE investors as well as to kids and to the future they represent.

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Stay On Top Of Important Local And National Commercial Real Estate Legislation With Scout

One of the greatest things about our system of government is the amount of lawmaking done in public.  The texts of bills, and speeches on bills of all kinds is public information. When proposed laws come up, we have a chance to see what they are, where they came from, who they will benefit, who they will impact and why, and when the votes are coming.

But because of all the work involved, it’s still a only a slim chance.  Being allowed access to this information is merely the first step. For example, NAR Commercial’s efforts on Capitol Hill include this exhaustive work of staying on top of the congressional record, watching carefully for issues that relate to commercial real estate when they arise, tracking their progress through the chambers and replicating all of this for all 50 states in addition to DC.

Before action comes alert, filtering, progress monitoring.  So when a free software tool comes along to allow individuals to help out with the legwork needed before action, you bet we’re going to talk about it.

The Sunlight Foundation is a non-partisan, non-profit based in DC dedicated to making government transparent and accountable.  They’ve rolled out Scout, which is an awesome new tool that alerts you when Congress or your state house proposes legislation that affects you or your commercial real estate clients.  You set up keywords such as “retail” or “commercial real estate” or “property tax” and the site will alert you when these terms appear in pending legislation — including in your state house!

Scout’s uses for commercial real estate pros are many.  All real estate is local, and so is all state legislation. Since Scout works with state houses and not just DC, there are numerous opportunities to use it to directly add value to your relationships.  Early warning about legislation coming down the pike in the state house about road construction in a given area can be a great subject of discussion between you and your retail clientele.  Bills proposing anything touching financial issues probably matter to your clients – Scout lets you be the one to bring them up.

Similarly, when Congress in DC kicks around changes in REIT accounting, it can help those of you in the investment side know what’s coming tax-wise and adjust accordingly.

Check out Scout. Watch the short tutorial video below and share with us what you find.  Help us keep government working for you.

 

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NAR Signs Letter Supporting US REIT Act: What’s In The Bill?

English: Capitol Hill

Some commercial real estate advocacy news from the Hill: Hon. Patrick J. Tiberi (R-OH) and Hon. Richard E. Neal (D-MA), both co-sponsors of H.R. 5746, also known as the Update And Streamline REIT Act (U.S. REIT ACT)  received a letter from NAR and major trade associations in support of the Congressmen’s bill.

Letter text:

June 11, 2012

The Honorable Patrick J. Tiberi The Honorable Richard E. Neal

United States House of Representatives United States House of Representatives

106 Cannon House Office Building 2208 Rayburn House Office Building

Washington, D.C. 20515 Washington, D.C. 20515

Dear Representatives Tiberi and Neal:

On behalf of the commercial real estate industry, we are writing to express our support for H.R. 5746, the Update and Streamline REIT Act (U.S. REIT Act), and to thank you for your leadership in co-sponsoring this non-controversial, bipartisan legislation.

In 1960, Congress enacted the original tax provisions that created the opportunity for individual investors to obtain the benefits of large scale, income-producing real estate while diversifying their investment portfolio. Today, REITs are widely held entities that own about $900 billion of commercial real estate properties, amounting to approximately 20% of investment grade commercial real estate in this country. At little or no revenue cost, the U.S. REIT Act would make a number of narrowly targeted, but important, changes to the tax rules applicable to REITs to enable them to operate effectively, keep up with market changes, and remain consistent with the Congressional goal of more than five decades ago of making professionally managed, income producing real estate available to investors from all walks of life.

Commercial real estate is an important contributor to the U.S. economy and impacts the way in which Americans live, work, shop, and carry on business. REITs are a small but significant part of the larger real estate community. We applaud your efforts to keep the rules governing REITs up to date to make it easier for investors to diversify their retirement and savings portfolios, and we fully support H.R. 5746.

Sincerely,

American Hotel & Lodging Association

American Land Title Association

American Resort Development Association

American Seniors Housing Association

Building Owners and Managers Association (BOMA) International

CCIM Institute

CRE Finance Council

Institute of Real Estate Management

International Council of Shopping Centers

Investment Program Association

Manufactured Housing Institute

NAIOP, Commercial Real Estate Development Association

National Apartment Association

National Association of Real Estate Investment Trusts

National Association of Realtors

National Multi Housing Council

Realtors Land Institute

Society of Industrial and Office Realtors

The Real Estate Roundtable

So What’s In The Bill?

The U.S. REIT act (full text of the bill here) (detailed summary from REIT.com here) proposes changes in the law governing the sale of REIT assets, the distribution of dividends and other aspects.  A quick summary follows:

Dealer Sales Safe Harbor Provisions

Under some conditions, REITs can earn a stiff penalty of 100% taxability on the sale of certain assets.  In “prohibited transactions” or “dealer sales” as currently defined, an rental or timber asset meets certain thresholds of capital improvements made to a rental property or a REIT has performed greater than seven sales during that year.  The bill proposes the liberalization of these requirements, making it easier to operate effectively and with the liquidity they need.

The Preferential Dividend

Tthe current rules on distribution of dividends among a REIT’s investors are under proposed change.  The change is proposed in the wake of the Regulated Investment Company Modernization Act, signed into law in 2010.  In that law, mutual fund preferential dividend distribution rules were liberalized; the U.S. REIT act seeks similar loosening and related changes.

More: Income and Asset Tests, Duplicative Taxation

Also up for change is the formula allowing what ratios of asset classes REITs may hold, as well as a change in accounting rule that seeks to avoid the current potential for double taxation.

Check out the entire summary from REIT.com here.

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Entertainment Industry REITS: Where Hollywood And Main Street Meet

Variety (magazine)

What’s interesting about real estate investment trusts (REITs) is they provide a way to invest in a sector through a portfolio of commercial properties doing business in that sector. Publicly traded REITs number about 200 and touch on many vital commercial RE sectors from self-storage to multifamily to office and every other CRE specialty.

So when Hollywood’s Variety writes about REITs, it’s a bit of a surprise at first.  At least it’s a surprise until you remember that the movie business consumes a lot of commercial property in the form of the production studio.  They don’t call it a “backlot” for nothing.

Joseph Lisanti’s piece on entertainment industry REITs  spells out that the intersection of showbiz and square footage forms a small number of investment opportunities – he identified two although there are more – that match properties with investment capital.

Hudson Pacific Properties owns office buildings in Northern and Southern California as well as the Sunset Bronson Studios (the original Warner Bros. Studios) and Sunset Gower Studios (Columbia Pictures’ headquarters through 1972). The studios represent about 20% of HPP’s revenues, but some of its office properties, including the Technicolor Building in Hollywood, also have a biz connection.

Taking a different tack is Entertainment Properties Trust (ticker symbol EPR), which owns 112 multiplex venues and close to 2,000 screens. The company also owns metropolitan ski parks and properties used for public charter schools, but 77% of its revenue comes from theater properties and associated retail operations.

We’d blogged about Entertainment Properties Trust before – a CNBC clip featuring EPT’s CEO David Brain talks about the formation of portfolios, which should be of interest to any broker.  Theater as economic driver and keystone for nearby commercial property value is a common story in primary, secondary and tertiary markets alike.

 

 

 

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REIT Growth: Video With Jim Cramer And David Brain

Wherein CNBC’s favorite slapper, dinger and yelper Jim Cramer sits down to talk Real Estate Investment Trusts with David Brain, CEO of Entertainment Properties Trust. Brain manages portfolios ranging from movie theaters to recreational properties to charter schools.  REITs are on the rise yet again, and commercial brokers have a greater role than ever in driving that market.  Check out how in this clip.