News
SWEET ON REITS
June 8, 2011
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| US REITs have been on the run lately, their performance nearly double that of the broader equity market in the first five months of '11, we learned yesterday at NAREIT's REITWeek. Over 1,000 investors crowded the Waldorf-Astoria to hear presentations of 100 REITs, which continues through today. Some stats to chew on: the self-storage sector topped other REIT market sectors in the first five months of this year, with an 18.4% gain. Among the primary food groups: the office sector led the way with a 17.8% gain, followed by apartments (16.9%), industrial (16%), and retail (13%). Within the retail sector, regional malls drove performance with a 17.6% gain. And leading the way for investor return over the past 12 months was industrial (45.6%), apartments (38.7%), retail (34.5%), and office (29.3%). |
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| Keynoting the luncheon was Roubini Global Economics founder and NYU professor of economics Nouriel Roubini, dubbed Dr. Doom byNew York Times Magazine. But his outlook was only partially so: crisis in the Middle East, Japanese earthquake, commodity prices, and an unsustainable fiscal deficit. The market has been resilient despite several shocks to the global economy, and there are things going our way: a global economic recovery, lowered risk, corporate balance sheets in better shape, an improving CRE market, and long-term growth prospects in emerging markets. There have been talks of a global economic slowdown, but optimists are saying it’s just a soft patch. Potential rough spots include painful deleveraging in the public and private sectors, unemployment, government debt, the periphery of the euro zone, and loss of competitiveness in the US. |
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| AvalonBay Communities’ growth has been stronger than anticipated, with FFO growth of 19% year-over-year, we learned from CEO Bryce Blair (right), joined by CFO Tom Sargeant and president Tim Naughton. (This will be Bryce’s last REITWeek appearance as CEO, after he announced his end-of-year retirement Monday; Tim will assume the position.) Fundamentals in the multifamily market continue to improve; the REIT saw a 7% to 7.5% growth in rates for renewals and new move-ins. Traffic and turnover remain elevated thanks to young adults’ propensity to rent, housing market sluggishness, and a lack of supply, which is still encouraging despite slowing GDP and job growth. It’s a good time to put capital to work, they say—and it has $900M in new communities under development. There’s also opportunity for rental growth, as its tenants are spending 20% of their income on rent, where 21% to 22% is normal. Next week, it’s breaking ground on Avalon North Bergen in NJ, which will offer 164 luxury apartments and 17k SF of retail. |
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| Say hello to the new ProLogis, less than a week after the completion of its merger with AMB Property Corp. Co-CEOs Hamid Moghadam and Walt Rakowich were joined by CFO Bill Sullivan (center) and say there’s less industrial demand in the US than the REIT had hoped, while there’s a pick-up internationally. The real activity will come from Japan, where building owners residing in 30- to 40-year-old buildings post-earthquake will reconsider their properties and drive development starting at the end of this year. One of ProLogis’ priorities is capitalizing its Japan fund, and it needs to attract third-party fund structures to supplement its income. Another: recycling $2B to $4B worth of assets over the next three years to capitalize its funds, new development, and a modest acquisition pipeline, as well as deleverage its balance sheet, which is currently in the low-40s(they hope to get down to 30%). |
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| Developers Diversified Realty CEO Daniel Hurwitz (with CFO David Oakes) recently returned from ICSC RECon in Las Vegas and says one of the most surprising things he learned was that people view retailers’ reduction in footprint as a negative; instead, he sees it as a positive, with greater inventory turnover and higher sales per SF. Performing franchises are back, and DDR is seeing net positive in small shop leasing, thanks to franchisers offering more financial stability to franchisees and a rise in small business loans. People can utter development all they want, Daniel says, “but I don’t think it makes sense to engage in it just yet.” It might be wiser to look into redevelopment plays instead, since there are assets for sale. One hot—or should we say caliente—market for DDR: Puerto Rico, where there’s been demand for US retailers and limited supply. |
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| The hotel industry tracks the economy, and the year has started slower than Host Hotels & Resorts had hoped, says CEO Ed Walter(center, with Raymond James & Associates’ Bill Crow and Host EVP Greg Larson). But the second half may be stronger—Host is still seeing RevPAR growth, and business investment has grown by 8%, fueling transient travel demand. It’s not as optimistic on employment, which tends to lead corporate group activity. Cap rates have been fairly low, so hotel players have been more active on the acquisition side, including REITs and private funds. Competition in the US has Host looking for opportunities in Europe, Asia, and Brazil, which offer better yields, they say. Host’s sales activities will increase, and while it will be looking for investment opportunities, much of it will be reinventing hotels it already owns. Earlier this year, it announced it was acquiring the fee-simple interest in the 775-room New York Helmsley Hotel for $314M. |
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| And area REITs were busy chugging away at deals as we reported from the Waldorf. SL Green announced that it had successfully refinanced the 1.4M SF 919 Third Ave, which it owns in a JV with the NYS Teachers Retirement System. The new 12-year, $500M mortgage was originated by MetLife and Pacific Life Insurance Co, and bears a 5.1% fixed-rate interest, replacing the former 10-year, $250M loan that had a balance of $218M and was set to mature this August. Holliday Fenoglio Fowler arranged the financing. |
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| Mack-Cali then announced its second major lease in a week at 125 Broad St. Continental Casualty Co inked a new 19-year, 81k SF lease, right on the heels of General Reinsurance Corp’s 21-year,56k SF lease. ARG Realty Consultants’ Alan Grossman, along with CBRE’s Steve Siegel, Bruce Surry, and Christopher Mansfield repped the tenant. CBRE’s Mark Ravesloot, Peter Turchin, and Gerry Miovski repped Mack-Cali in both deals. |
