{"id":1004138187,"date":"2016-03-03T20:33:38","date_gmt":"2016-03-04T04:33:38","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004138187"},"modified":"2021-05-15T07:58:18","modified_gmt":"2021-05-15T15:58:18","slug":"reits-build-buy-or-both","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/reits-build-buy-or-both\/","title":{"rendered":"REITs: Build, Buy or Both?"},"content":{"rendered":"

By Amanda Marsh<\/p>\n

The equity markets got off to a rough start in 2016, and REITs have not entirely escaped the fallout.<\/p>\n

\u201cWe\u2019re in a very interesting time,\u201d said Mike Straneva, leader of the real estate practice for the Americas at Ernst & Young LLP<\/a>. \u201cIt\u2019s a Main Street-vs.-Wall Street phenomenon, in which Main Street rents are high, real estate is recovering and the sentiment is generally good. But on Wall Street, share prices are falling.\u201d<\/p>\n

\"Steven-Marks_800x600\"<\/a>

Steven Marks, Managing Director, Fitch Ratings<\/p><\/div>\n

That combination of circumstances is challenging one of REITs\u2019 tried-and-true growth strategies. \u201cGiven the cost of capital, they can no longer make the acquisitions of the past, but instead are turning to joint ventures or teaming with private equity or sovereign wealth funds to make those purchases,\u201d Straneva continued. \u201cOthers are heading toward privatization.\u201d<\/p>\n

Strategies for closing the gap between depressed stock prices and net asset value include focusing on key markets, redevelopment, maximizing existing portfolio value, disposing of non-core assets and cleaning up the balance sheet, noted Brian Ruben, partner and non-listed REIT leader in Deloitte LLP<\/a>\u2019s real estate practice.<\/p>\n

\u201cThey don\u2019t want to end up in a liquidity crunch if there\u2019s a recession in a few years,\u201d he said.<\/p>\n

The low stock prices have also conditioned behavior that Steven Marks, managing director at Fitch Ratings<\/a>, said he hasn\u2019t seen since the end of the financial crisis. For instance, more REITs are stepping up the pace of dispositions and are viewing development, rather than acquisition, as the preferred strategy. Share buybacks are more frequent, and some REITs are increasing draws on their lines of credit. Fitch Ratings views the latter as a credit negative, because it reduces liquidity and limits access to external sources of capital in a downturn.<\/p>\n

Smart REITs, which Marks says are the majority, are raising equity opportunistically to fund development, whether via underwritten or at-the-market offerings, he added. They\u2019re also being more aggressive about pre-funding debt maturities and are again embracing the role of credit.<\/p>\n

\u201cBefore the previous crisis, REITs hadn\u2019t been as focused on leverage on a debt-to-EBITDA basis, but today they\u2019re looking at leverage (and) building liquidity, and are being more vigilant in regards to maintaining access to various forms of capital,\u201d Marks explained. Overall, there\u2019s been a secular shift as REITs embrace lower-risk strategies for liquidity, development and portfolio management.<\/p>\n

Tale of two REITs<\/strong><\/p>\n

Columbia Property Trust<\/a> is in the midst of a major makeover. During the past three years, the Atlanta-based office REIT has cut its markets in half, from 32 to 15. When several pending dispositions are complete, that number will drop to 12; just four will account for 75 percent of its holdings: San Francisco, Manhattan, Washington, D.C., and Boston.<\/p>\n

\"Columbia<\/a>

Columbia Property Trust\u2019s 650 California St. in San Francisco.<\/p><\/div>\n

\u201cWe\u2019re building our portfolio for the long haul as, over time, demand is stronger in these markets and there exists a high barrier to entry,\u201d explained Nelson Mills, Columbia\u2019s president & CEO. Although the approach is dilutive to earnings in the short term, the company is confident about its long-term value.<\/p>\n

While some REITs favor development, Columbia is focusing on the buy side. Over the past two years, it has purchased six assets for a total of about $2 billion; all but one had significant leasing opportunities. The REIT is looking to expand in Boston and has its sights set on West Los Angeles, but given current market volatility, future acquisitions will likely entail less leasing risk.<\/p>\n

\u201cThis is the time to strengthen the balance sheet and be more conservative on underwriting and rental assumptions,\u201d Mills asserted.<\/p>\n

VEREIT\u2019s<\/a> business plan, released last August, proposes to cull between $1.8 billion and $2.2 billion of worth of assets from its portfolio by the end of the year. The REIT has already made significant headway toward that goal, completing dispositions valued at $1.4 billion as of last Dec. 31.<\/p>\n

\u201cWe don\u2019t see a market pushback to our strategy,\u201d said Glenn Rufrano, VEREIT\u2019s CEO. Since the beginning of the year, REITs have slipped 4 percent to 5 percent on the RMZ and RMS indices, but the net lease sector (in which VEREIT participates) is up 5 percent. \u201cAs people look to invest, they\u2019re gravitating towards safety, and the public markets indicate that\u2019s net lease,\u201d Rufrano asserted.<\/p>\n

Other strong categories include niches like student housing, medical office, self-storage and mobile homes, analysts said.<\/p>\n

Fundamental issues<\/strong><\/p>\n

Analysts and executives remain generally bullish on real estate and the U.S. economy. Steady growth on multiple fronts has enabled property owners to push rents, Marks noted.<\/p>\n

Even though real estate is hardly immune to global political and financial uncertainty, the 2 percent annual GDP growth rate in the U.S. stands out from the pack, Rufrano said. \u201cAs a result, we\u2019re attracting global capital. Additionally, our banking system looks stable enough that it should withstand loan problems and be in reasonable shape for 2016.\u201d<\/p>\n

\"Brian<\/a>

Brian Ruben, Partner, Deloitte LLP<\/p><\/div>\n

And despite worries about the effect of interest rate increases, cap rates may not be heading upward anytime soon, Ruben added.<\/p>\n

\u201cThere\u2019s limited supply in certain sectors, which means it may be more advantageous to build, as replacement cost is (lower) than acquiring in a tight market,\u201d he said. Yet he warned that REITs can no longer adopt a \u201cbuild it and they will come\u201d mindset.<\/p>\n

\u201cSurviving today\u2019s market is all about innovation,\u201d he said. \u201c[REITs] need to respond to changing demands of the consumers and users of real estate,\u201d such as the shift toward a shared economy and the rise of the Millennials.<\/p>\n

Got dry powder?<\/strong><\/p>\n

Another trend to watch: private equity investors continuing to deploy their abundant resources to buy equity REITs. \u201cWhen there\u2019s a lot of dry powder coupled with companies traded at a discount, it may be easy to take some of these $2 billion to $3 billion public REITs off the table,\u201d Ruben said.<\/p>\n

Since REIT stock prices are falling short of their targets, a flurry of IPOs is unlikely this year. Exceptions may include REITs grandfathered before recent legislative changes to tax-free spinoff rules, or IPOs that were already on the runway, Straneva explained.<\/p>\n

\u201cThe prices are making them think they\u2019re going to take a later flight,\u201d he warned. \u201cBut if you did not make that window, then your numbers are now stalled and you are going to have to wait for year-end [numbers] to place in your IPO filing\u201d\u2014which could delay filings until March or April.<\/p>\n","protected":false},"excerpt":{"rendered":"

REITs retool for a stormy stock market.<\/p>\n","protected":false},"author":938,"featured_media":1004130719,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,21825,22251,21783,23891],"tags":[],"class_list":["post-1004138187","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-finance","category-in-focus","category-investment","category-national"],"acf":[],"yoast_head":"\nREITs: Build, Buy or Both? - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/reits-build-buy-or-both\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"REITs: Build, Buy or Both?\" \/>\n<meta property=\"og:description\" content=\"REITs retool for a stormy stock market.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/reits-build-buy-or-both\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2016-03-04T04:33:38+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2021-05-15T15:58:18+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2015\/11\/Steven-Marks.png\" \/>\n\t<meta property=\"og:image:width\" content=\"800\" \/>\n\t<meta property=\"og:image:height\" content=\"600\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Amanda Marsh\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/reits-build-buy-or-both\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/reits-build-buy-or-both\/\",\"name\":\"REITs: Build, Buy or Both? 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