Browse Tag: reit

REIT Risk: Bank Borrowing Rising

English: US Bank tower in Denver, Colorado. Are banks a source of REIT risk?

The real estate investment trust (REIT) is an investment vehicle with a particular sensitivity to borrowed capital. REIT risk tied to capital source is heightened because the legal structure of a REIT is centered on distributing the vast majority of its earnings to shareholders.  This means the REIT is prevented from holding back significant capital reserves, which in turn means it must borrow to finance its acquisitions and operations.  That borrowing takes the form of credit from bondholders and from banks.

Taken by itself, the REIT structure’s dependency on external capital need not present untoward risk to the REIT, but the borrowing side needs balance to protect the REIT from overexposure to a certain type of borrowing.  Between the two tradition avenues, commercial banks and bond issuance, US REITs are increasingly exposed to bank credit.

According to a new REIT risk report by investment ratings agency Fitch, US REITs have doubled their exposure to bank borrowing over the past seven years. Fitch put the borrowing from commercial banks at 8.5% of total REIT debt in 2010. That figure is now 16.5% as of year-end 2016.

Access to multiple forms of capital is a characteristic of investment-grade REITs, and a weakening in the unsecured bond markets would challenge REITs to tap additional unsecured bank borrowing. Fitch has viewed negatively companies with less mature capital structures that rely on fewer sources of funding. The inability of issuers to obtain cost-effective unsecured funding via the bond or bank market could cause rating downgrades or negative outlook changes.

Two Environmental Factors: Low Interest, High Profile

The changes come as REITs have literally come into their own as an equity investment — 2016 was the year that REITs received their own sector classification from Standard & Poor, taking them out of the wider category of “finance” and into a spotlight of their own.  That move boosted REIT stocks in the investing public’s eye at the same time that very low interest rates have prodded REITs seeking capital toward corporate bond issuance and the risk premiums that go with these bonds.

Both factors have emphasized the viability of REITs as an investment class, but the rise in one kind of vital borrowing that will be sensitive to Federal Reserve interest rate moves, which can almost go nowhere but up — is seen as a signal by Fitch that balance in borrowing sources is something REITs need more of as a class.

(Photo credit: Wikipedia)

GICS Real Estate: Soon In A Class Of Its Own

Chart showing pyramid of GICS classifications
Above: The GICS classification today.

The global business classification called GICS is about to undergo a makeover, and real estate is about to come into its own.

GICS was created in 1999 as a classification arrangement to categorize every type of publicly traded company.  GICS is a four-tiered, hierarchical industry classification system, consisting of ten sectors, 24 industry groups, 67 industries and 156 sub-industries.  Classifications are assigned by a company’s principal business activity, and the classifications are used as a basis for market indexes such as a traded and tracked on financial markets.

Here’s the entirety of the GICS categories today.  You’ll notice real estate is currently a subgroup of the “financials” sector:

Code Sector Subcode Industry Groups
10 Energy 1010 Energy
15 Materials 1510 Materials
20 Industrials 2010 Capital Goods
2020 Commercial & Professional Services
2030 Transportation
25 Consumer Discretionary 2510 Automobiles & Components
2520 Consumer Durables & Apparel
2530 Consumer Services
2540 Media
2550 Retailing
30 Consumer Staples 3010 Food & Staples Retailing
3020 Food, Beverage & Tobacco
3030 Household & Personal Products
35 Health Care 3510 Health Care Equipment & Services
3520 Pharmaceuticals, Biotechnology & Life Sciences
40 Financials 4010 Banks
4020 Diversified Financials
4030 Insurance
4040 Real Estate
45 Information Technology 4510 Software & Services
4520 Technology Hardware & Equipment
4530 Semiconductors & Semiconductor Equipment
50 Telecommunication Services 5010 Telecommunication Services
55 Utilities 5510 Utilities

Moving On Up

Proposed in 2014 and expected to be rolled out by August of this year is a major change to the categories concerning real estate.   Currently, real estate is arranged as a sub-category of the big-ten category of “financials”.  The change will bring real estate out from that classification and elevate it to a new, eleventh category named, surprisingly enough, “real estate”.

Why the move?  At REIT.com, the prevailing thoughts in a piece about the move are that it reflects the evolution and success of the real estate investment trust (REIT):

Michael Grupe, executive vice president for research and investor outreach at NAREIT, describes the change as “another important and warranted event in the long-term growth and development of stock exchange-listed REITs and real estate companies.” He notes that the classification structure of GICS frames much of the product development, investment research, media coverage, and investment strategies of both institutional and individual investors.

Mike Kirby, chairman and director of research at Green Street Advisors, points out that the commercial real estate sector hasn’t had its own Sector classification in the past because it had been difficult for investors to access the sector through listed securities prior to the Modern REIT Era.

“The success and growth of the U.S. listed REIT market has changed that, and classification of real estate as a sector in GICS is a welcome validation of the fact that any diversified investment portfolio needs significant exposure to REITs,” he said.

The sector classification provides “yet one more rebuttal to anyone treating REITs differently than other equities. So this change should, at the margin, make them more attractive to the generalist community,” Kirby adds.

“GICS” is a registered trademark of McGraw Hill Financial and MSCI Inc.

Source: Real Estate’s Big Debut | REIT.com

REIT Risks: A List Of Top Factors

English: Phillippine stock market board

Beth Mattson-Tieg’s nifty deck at NREIOnline takes a useful look at the leading risk factors felt today by real estate investment trusts (REIT). The REIT marketplace is a prismatic view into commercial real estate fundamentals while they put prices on portfolios and sectors in ways that make investment easy.  This means that what REITs face are good indicators of what the broader CRE market faces, and that facts on the ground often mean similar things to portfolio managers as they do to individual owners and investors.

Where do the big risks lie in the list? Does industry consolidation come in as a higher risk than environmental liabilities? Where do changes to REIT tax benefits rank?  And capital acquisition —  it it still brutally difficult? On that last point:

Although REITs tend to be a little more conservative on leverage, access to capital remains a concern as a large portion of the REIT market is continuing to trade at a discount to net asset value (NAV). After record issuance in 2015, when U.S. equity REITs issued $75.6 billion in common and preferred equity, unsecured bonds and term loans, overall capital issuance through March 21 is down by 18.6 percent compared to the same period a year ago, according to Fitch Ratings. In addition, REITs are concerned about the disruption in the CMBS market over the past nine to 10 months. 

Check out the entire deck from NREIOnline here.

 

The See-Through LLC: Federal Tracking Of Real Estate Shell Companies Is On The Rise

Seal of the United States Financial Crimes Enf...

In Miami-Dade County and Manhattan, be prepared this year for unprecedented federal oversight in the real estate deal space. Prompted by worries about money laundering, the US Treasury Department has announced it intends to require certain US title companies to identify the natural persons behind shell companies that are used to pay all cash for high-end luxury real estate.

While the effort concerns luxury residential property, it serves as a reminder that legal and legitimate structures such as LLCs (limited liability corporations) that are often used to structure commercial property transactions could be facing greater scrutiny, potentially impacting the opacity that entirely legal transactions might seek.

“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” said FinCEN Director Jennifer Shasky Calvery. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address.”

The New York Times piece by Louise Story on the new federal targeting says:

Real estate is becoming a larger target for law enforcement as well. According to two people with knowledge of cases at the Justice Department, lawyers there have begun to shape cases directly around money laundering in real estate deals rather than adding such transactions to other cases.

The F.B.I. has in recent months created a new unit to focus on money laundering, and real estate will be one main focus. The unit, which has 10 agents, will help the Justice Department delve into shell companies and the people involved in money laundering, F.B.I. officials said.

“We’re going after the facilitators of the money laundering,” Mr. Fallon, of the F.B.I., said. “They’re the bankers, they’re the accountants, lawyers, folks who are setting up L.L.C.s, they are setting up foundations, folks who are setting up nonprofits, real estate investment trusts, etc.”

Read the entire NYT piece here:
U.S. Will Track Secret Buyers of Luxury Real Estate

Commercial Real Estate National News Roundup For July 7, 2015

REITs cautious because of possible interest rate hikes, offices surge in some secondary markets, good news and bad news about Atlanta’s CRE, industrial property will be hot for the rest of 2015.  It’s all here at the Commercial Real Estate national news roundup for June 22, 2015.

General

Office

 

Industrial

 

Retail

 

Multifamily

Three REITs Starting 2015 With Strong Health Care Acquistions

REITs aren’t just a channel for equity-style investment in commercial real estate, they’re a kind of barometer to use to keep an eye on trends in specific sectors. When REITs go on a buying spree, it pays the trend-watcher to pick out what’s being acquired as well as the price tags. This way questions can be answered about where capital is meeting property – is it in tertiary or secondary markets?  Is medical office looking better to portfolio managers than is assisted living? Presented are some of January’s biggest REIT acquisitions in the health care sector.

1.  Griffin Capital’s Griffin-American Healthcare REIT III picked up more than $340 million in health care property in January.  The 19 acquisitions broke down into 17 medical office buildings, one acute care hospital, and one senior housing facility.

“These latest acquisitions represent high-quality assets leased by very strong tenants and operators with whom we look forward to sharing mutually rewarding business partnerships,” said Danny Prosky, president, chief operating officer and one of the largest stockholders of the REIT. “They also add tremendous diversification to our rapidly growing portfolio.” 

Notably, the REIT has announced that it has executed letters of intent and/or purchase and sale agreements to acquire 31 additional healthcare properties for an aggregate purchase price of approximately $530 million. These pending acquisitions are subject to customary closing conditions and the satisfaction of other requirements as detailed in the agreements.

2. Leading the three in dollar amount, Ventas completed a whopping $2.6 billion merger with American Realty Capital Healthcare Trust that netted 143 health care properties. This breakdown was more diverse than Griffin’s, as medical office buildings added up to half of the portfolio. The other half was more or less evenly taken up by assisted living, hospitals and senior housing.  The full breakdown: 78 medical office buildings, 29 seniors housing operating communities, 13 seniors housing triple-net properties, 14 skilled nursing facilities, 7 hospitals, and 2 land parcels.  For a look at where these properties are, click on Ventas’s map below.  Read about the merger in full at this PDF.

ventas-acquires-arc

3. Health Care REIT acquired a portfolio of Massachusetts, New Hampshire and Connecticut assisted living facilities for $360 million. The deal was completed in January and represented a profitable turnaround for the seller, Intercontinental Real Estate of Boston. The Boston Globe reports Intercontinental purchased the portfolio in 2005 for about $152 million and later put in about $20 million in renovations. The poftiolio consists of nine senior living facilities.

REITWorld: John Case, CEO of Realty Income

John Case, President and CEO of Realty Income Corp (NYSE: O)  talks sustainability and durability of its acquisitions and how they drive dividends.  Year to date, the REIT has sourced $20B of acquisitions and expect to close $1.4 billion more by year’s end. The clock’s ticking on that, but let’s not forget how much holiday shopping is put off until the last minute.

Direct Investment In Self-Storage: Few Public REITs, No Waiting

English: Corridor with self-storage units (in ...

 

When H. Michael Schwartz, CEO of Strategic Storage Holdings, spoke in San Diego at the recent REISA Spring Symposium, the head of one of the top ten operators of self-storage said something interesting about the state of the marketplace in self-storage.

 

The role of self-storage with regard to multifamily has long been assumed – apartment dwellers on the whole occupy less space individually than homeowners yet display similar consumption patterns leading to a demand for space for their stuff.

 

But what’s interesting about self-storage as a sector today is the financing for such projects is not as institutionally available as with other sectors such as health care property, retail and office.  Few publicly traded real estate investment trusts (REITs) exist for self-storage while other sectors are well-represented by the dividend-throwing securities offerings.

 

Meanwhile, the self-storage market is “drafting off the success of multifamily,” according to H. Michael Schwartz of Strategic Storage Holdings. “We’ve been buying self-storage every year since 2005 and have seen traditional cap-rate compression, but also development opportunities. The lease-up opportunities from 2008-2011 are gone. We are now in a five-year phase of development.”

 

Schwartz adds that his firm is looking for retail locations in which to develop self-storage properties, and it looks at a 3- to 5-mile band to determine who its competition is. “We make sure we understand the market—what are people looking for in each market? What size unit? What features?”

 

The panelists also said the time is right for direct investing over REIT investing. “We’re not subject to the vagaries of the market the way a publicly traded vehicle would be,” said Lehew.

 

Schwartz added, “Public self-storage REITs are not developing, and this creates a nice alternative for investors in self-storage.”

 

For the $34 billion sector of real estate, there are only four publicly-traded REITs. The four include Public Storage (PSA), CubeSmart (CUBE),  Extra Space (EXR), and Sovran Self Storage (SSS).

 

The path that capital takes to get to a self-storage development is a short one these days — and is mainly routed around Wall Street.

Photo credit: Wikipedia

 

 

 

Enhanced by Zemanta

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.

 

Enhanced by Zemanta

CIB: How to Obtain Successful Negotiation Skills

President of Strategic Negotiations International

Many speakers try and give you tips and know-how of negotiations but few have the first-hand, global experiences, that Signature Series speaker Barry Elms can provide. From the Middle East to Midwest from the federal government to General Motors, Barry Elms discusses what his real life negotiations have taught him and will share some of those lessons learned to our Commercial Intelligence Briefing (CIB) listeners.

More on our speaker- Barry Elms, President of Strategic Negotiations International, is acclaimed by many as “America’s business coach in negotiation skills.” In the last 20 years, Barry has given more than 2,000 presentations to corporations and associations worldwide, including the National Association of REALTORS®. Click on the link to listen to this edition of the CIB as well as past recordings.

http://www.realtor.org/podcasts/commercial-intelligence-briefings

  • 1
  • 2