Health Care-Related Properties Top List of Most Likely To Attract Investment Dollars
This may well be the year that property owners in secondary and tertiary markets get a chance to cash in on the spending spree of the nation's largest publicly held REITs and real estate operating companies.
The torrid pace of acquisitions seen within this sector over the past two years is expected to continue this year, but with more buyers casting their nets across more markets.
As a whole, public REITs and REOCs doled out more than $54 billion in cash for property acquisitions last year, driving up prices for the most sought-after properties. The majority, more than 63%, bought more properties than they sold last year.
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Culling through CoStar Group's database, and more than 220 firms' annual and quarterly reports and first quarter 2013 earnings conferences, we've identified the 25 firms, mostly REITs, that appear to have the most active acquisition pipelines. This group averaged spending $1 billion each on property acquisitions last year making up about 13% of their total current assets of more than $184 billion.
One out of every five of the firms identified was a health care related REIT and together they accounted for one-third of all the spending in the 25 firms we have identified below.
Consolidation in the senior housing sector has been the overriding investment trend in the health care market, a trend that is likely to continue this year as the overall industry moves toward efficiency, according to a new report from Marcus & Millichap's National Senior Housings Group, Gary Lucas, managing director, and Stephen Hovland, senior analyst research services.
Senior housing operators with just one or two properties that need significant technology upgrades may find the current environment an optimal time to exit. Cap rates are sell-side favorable and buyers with plenty of capital are scouring the country for the right deals, especially value-add opportunities centered on improving the cost side of the business, the study noted. Larger owners may consider expanding their senior housing portfolios to achieve economies of scale and scope.
In terms of medical office buildings, an aging population along with the reasonably predictable level of health care services demand is making this formerly “alternative” property type extremely desirable, especially when bundled together, according to Mindy Berman, managing director for Jones Lang LaSalle’s Healthcare Capital Markets practice.
The changing investment perception of medical office property as an accepted asset class included in many institutional investors’ core real estate holdings is evidenced in the record level of portfolio sales volume in 2012. Spurred by high demand and a similarly high level of investment capital, sales of medical office building
(MOB) portfolios exceeded $2 billion in 2012, more than doubling the previous sales record set in 2007, Berman noted.
Developers have been the most dominant sellers of MOB portfolios over the past six years racking up more than $3.8 billion in sales, and they’ve also recouped the most value for their investment at a sales average of $305 per square foot.
Developers also have been the biggest supplier of new medical office buildings as hospitals have tended to retain their existing owned inventory of medical office. Developer product is likely to be new, Class A, on-campus or hospital-aligned property with the highest value.
American Campus Communities
On the heels of the 52 properties totaling $2.2 billion in it bought in 2012, American Campus Communities currently has an active pipeline in excess of $1 billion being underwritten. The pipeline consists of core in-fill student housing assets, all located in close proximity to Tier 1 universities.
"We also continue to track a large amount of new construction within Tier 1 university markets and are maintaining contact with developers and equity responsible for delivering that product," William W. Talbot, chief investment officer and executive vice president of the REIT, told investors in its quarterly conference call. "We are currently identifying markets where we believe significant resupply could result in overbuilding in the near term, especially at properties targeting rental rates at a premium to market."
"We are earmarking those markets as targets for acquisitions 18 to 24 months down the road, when absorption and stabilization have taken place at appropriate rental rates," he said. "This is a dynamic that we analyze and were able to successfully capture of acquisitions during the last cycle that overbuilding occurred."
Boston Properties has been in the process of selectively selling some of its assets to raise capital that it has been redeploying into new development projects, new acquisitions and repaying maturing debt. Although its focus has been on new development, that "doesn't mean that we won't be looking for acquisitions because that, again, is as we have demonstrated with a lot of buildings, from the General Motors Building to buildings in Washington to the John Hancock building, even to Prudential Center, there are a lot of situations where we feel we can go into an existing building and... improve its attraction as a building to be occupied and therefore, over time, to do very, very well," Mort Zuckerman, co-founder and executive chairman, told analysts this quarter.
"To be very blunt about it, because we have the financial resources and the credit to buy buildings and to actually lease buildings and to finance buildings, we think there will still be the opportunity for us to buy buildings with an appropriate spread between the yield at which we buy the buildings and the yield at which we can finance the building," he added. "And over the long term, if we pick the right buildings, as I think we have done for most of our history as a company and both as a private company and a public company, this will continue to enhance the asset base of the company."
Raymond A. Ritchey, the Boston Properties executive vice president who serves as the head of the firm's Washington, DC office and its national director of acquisitions and development, said he doesn't see a lot of building owners rushing to cash out.
"There are a few landlords and owners that are trying to take advantage of the increasing capital flow into real estate and the lower interest rates, and I do see some additional assets coming for sale, and obviously, we're trying to follow that lead, but I don't see a wholesale selloff," observed Ritchey. "In fact, I see several landlords reinvesting in existing assets to upgrade their current portfolio, as opposed to taking them to the markets. So I don't see a rush to the exits in terms of sales. I see selective opportunities becoming available. (It's) very hard for us to compete with the purchase of these existing assets (at current valuations), and that's why we focus on value add through development, as opposed to going out and trying to compete buying existing buildings."
Cole Credit Property Trust III
As of year-end 2012, Cole Credit Property Trust III had $7.34 billion in total assets, 32% of which it had acquired during 2012. The majority of the properties it bought, 807, were free-standing, single-tenant retail properties, 120 were free-standing, single-tenant commercial properties, 70 were multi-tenant retail properties, 16 were office and industrial properties along with one parcel with a new building under construction.
This past quarter, CCPT III closed on its acquisition of Cole Holdings Corp., its parent management company that currently manages more than $12 billion of real estate assets. With the deal, CCPT III has become the second largest publicly-traded REIT in the net-lease sector. Cole Holdings provides CCPT III with a portfolio of more than 2,000 properties with over 76 million square feet of corporate real estate under management.
In the first quarter of the year, the REIT also acquired interests in nine commercial properties for an aggregate purchase price of $25.2 million.
Cole Credit Property Trust IV
With its initial public offering in January 2012, Cole Credit Property Trust IV has grown through acquisitions to have total assets of $736 million as of March 31. Since then, the REIT has acquired 53 additional commercial properties for an aggregate purchase price of $466.3 million and now has more than $1 billion in property assets.
Corporate Property Associates 17
W. P. Carey Inc.-affiliated REIT, Corporate Property Associates 17, has raised $2.9 billion from common stock offerings since its launch in April 2011. It has used the moneye to acquire more than $4.4 billion of income-producing commercial properties across 10 countries. It intends to use the remaining net proceeds of the follow-on offering to acquire, own and manage a portfolio of commercial properties, primarily single-tenant net leased buildings.
During the three months ended March 31, it acquired a manufacturing and office facility at a cost of $10.9 million. In addition, it acquired a domestic entertainment complex at a cost of $15.7 million.
Shopping Center REIT, DDR Corp. looking to whittle the number of joint ventures it's in, this past week agreed to buy-out joint venture partner Blackstone in a portfolio of 44 shopping centers the pair own. DDR has executed a purchase and sale agreement to acquire Blackstone's 95% common equity ownership interest in 30 of these shopping centers for $1.46 billion. The acquisition is expected to close in the fourth quarter of 2013.
The portfolio includes all 10 properties that DDR has a current right of first offer to acquire, such as fortress shopping centers Shoppers World in Boston, Woodfield Village Green in Chicago, Fairfax Towne Center in Washington DC, and Riverdale Village in Minneapolis.
Digital Realty Trust
Digital Realty Trust's current acquisition pipeline and acquisition targets totals nearly $1 billion including high-quality stabilized property, value-add opportunities, ground up development sites, as well as sale-leaseback transactions. On top of that the REIT said it continues to track additional larger portfolios.
"We began the year with a healthy level of activity that included two properties, totaling four buildings that were 100% leased, one of which was the sale-leaseback with a major airline in the Minneapolis metro," Michael F. Foust, Digital Realty's CEO told investors and analysts. "The blended going-in, unlevered cash cap rate for the first quarter stabilized acquisitions was over 11%. In addition, we acquired another development project adjacent to our Chandler, AZ, property for running future inventory in this growing data center market, as well as a development project in suburban Toronto, Canada where we're seeing significant demand from new and existing customers for data center space."
Extra Space Storage
Extra Space Storage last year completed $700 million of acquisitions, with $500 million of that off market. It has a stated target of acquiring $150 million more in properties for the year.
"I think with the two properties that we acquired and the five under contract worth $66.5 million and (only) a third of the year is behind us," said Spencer Kirk, Extra Space CEO. "So, I would say, we're reasonably on track for what is or could be expected. What we don't know is the numerous conversations we're having how they are going to play out. We are like every other self-storage operator that is publicly traded, we've got a nice cost of capital advantage versus the private guys, both with debt and equity."
Despite the attractive capital advantage, Kirk said he plans to maintain sales discipline. "This is not the time to get crazy or become irrational because things can and will change," he added. "I don't know what the number will be this year, but I think that there are relationships that we enjoy that say we will participate in the open-market acquisition and we will participate in some off-market acquisition."
Griffin-American Healthcare REIT II
Completed first quarter acquisitions for Griffin-American Healthcare REIT II totaled $92.9 million, based on purchase price. Since the company's change in sponsor on Jan. 7, 2012, the company's portfolio has grown approximately 223.2% from $439 million to $1.42 billion as of March 31, 2013.
In February, the health care REIT commenced a follow-on offering of up to $1.65 billion to continue to fund its acquisition pipeline.
Health care REIT HCP completed $96 million of investment transactions in the first quarter.
"You'll see a pretty active 2013 from this point on, by the way, from our standpoint, both on the acquisition side but also on capital market side," James F. Flaherty, chairman and CEO of HCP told analysts and investors this quarter.
Flaherty said the market for deals has heated up since the outcome of this past November's contentious presidential election.
"I just think you had kind of gridlock there for quite a while," he said. "And now people are starting to come out of it. It's not like it's off to the races time. But I think you're getting to the point where through price discovery and access to the capital markets, I think there's -- there's some -- you're starting to see some meaningful interaction between prospective counterparties as it relates to incremental transactions."
Health Care REIT
Aptly named Health Care REIT was the largest spender on this list for new properties last year; it was also one of the largest sellers of properties too. It is the only firm that also made last week's CoStar lists of the 25 REITs Most Likely To Sell You a Property in 2013
This quarter, it acquired $2.6 billion of gross investments and sold $255 million of non-core properties. This past week, it completed a public offering of 23 million shares of common stock for gross proceeds of $1.7 billion.
It also announced plans to partner with Revera Inc. to own 47 seniors housing communities with approximately 5,000 units located in major Canadian metropolitan markets. The portfolio, which is currently 100% owned by Revera, is primarily comprised of independent living communities.
Hines Global REIT
Los Angeles-based Hines Global REIT acquires properties around the globe but about half of its acquisition activity has been focused on the U.S. It paid out more than $590 million in cash last year on property acquisitions and has continued to do so this year.
Most recently, Hines Global REIT this month acquired the Campus at Playa Vista, a four-building Class A office complex in West Los Angeles.
Industrial Income Trust
Industrial Income Trust is currently in the acquisition phase of its life cycle. During the quarter ended March 31, it acquired seven industrial buildings comprising 1.3 million square feet for $91.6 million. The properties were located in New Jersey, San Francisco Bay, Dallas, Pennsylvania, and Seattle.
The REIT said it is continuing to expand in its target markets by acquiring primarily industrial buildings with generic features that can accommodate a wide range of tenants. The REIT said it will initially overweight the “top 10? key national distribution markets for acquisitions but will also capitalize on opportunities in other “top 25? distribution markets.
Inland Diversified Real Estate Trust
Last year, Inland Diversified Real Estate Trust acquired 92 properties totaling 6.8 million square feet and 144 multifamily units for $1.19 billion - approximately 50% of its current portfolio. As of March 31, it owned and operated 142 properties with a combined purchase price of approximately $2.2 billion, containing 12.4 million square feet of retail, industrial and office properties, and 444 multifamily units.
Retail REIT powerhouse Kimco Realty, which has not been one of the most active buyers last year, made the list for what it has been doing this year. The REIT has joined with Blackstone to acquire the UBS Wealth Management-North American fund stake in 39 shopping centers. The deal is scheduled to close over the next 30 to 60 days.
Kimco also closed the Cerberus-led SuperValu transaction, which reunited the Albertsons stores it already owns with the Albertsons stores operated by SuperValu, while also purchasing four other supermarket brands formerly operated by SuperValu: Acme, Jewel, Shaw's and Star Market.
Other U.S. investment activities since the beginning of the year primarily involved opportunistic purchases of joint venture equity interest from five different institutional partners, totaling $53 million.
During the quarter, it also acquired the second phase of its large grocery anchored shopping center complex in the high income community of Wilton, CT. And this week, it added the Marketplace at Factoria in the suburban Seattle community of Bellevue, WA, to its consolidated portfolio. The company has acquired a majority of its joint venture partner's ownership interest in this 510,000-square-foot shopping center based on a gross value of $130.75 million.
Medical Properties Trust
Health care REIT, Medical Properties Trust has been prepping for a series of second half of the year acquisitions.
"During this past quarter we made tremendous progress on these acquisitions. Our active acquisitions pipeline is larger today than it has ever been," Ed Aldag, chairman, president and CEO of Medical Properties Trust told investors this quarter. "I want to be clear I'm referring to our active acquisition pipeline not a shadow pipeline. These are properties that we are actively working towards the close."
"We certainly recognize that we will most likely not close on each of these. However, the number and dollar amount of properties we are actively working are larger than they have ever been and has always been the case we do not comment on acquisition targets but we ultimately pass on," he added.
Our existing portfolio of performance fell right in line with what you've seen nationally over the past few weeks, essentially our EBITDA coverage for all three of our major sectors was flat to slightly down quarter-over-quarter. However, for year-over-year they were slightly up to flat, the utilization of our facilities also followed these trends.
The REIT has almost $500 million of immediately available resources for acquisitions and estimates that it will acquire at least $400 million in new properties this year.
National Retail Properties
In the first quarter, net lease REIT National Retail Properties acquired 17 properties for $43 million.
"The good news is that our acquisition activities for the first four months of 2013 are nicely ahead of both budget and guidance from a timing standpoint, and our initial yields remain ahead of what we anticipated," Craig MacNab, chairman and CEO of National Retail told analysts. "The acquisition market continues to be robust, and our current deal flow gives me confidence that 2013 will be another good year for NNN."
Last year, office REIT Parkway Properties embarked on a strategy to acquire what it terms "critical mass" in certain targeted sub-markets where it owns major buildings.
"From an investment standpoint, we continue to see opportunities to enhance the growth of our portfolio at attractive pricing with assets that complement our long-term investment strategy," said Jim Heistand, president and CEO. "We are also constantly evaluating in all of the sub-markets throughout the Sunbelt and we believe there will be opportunities to continue to build a portfolio of high-quality assets in key targeted areas."
Parkway has a contract on Lincoln Place, a 140,000-square-foot office and retail tower in the South Beach submarket of Miami. During the first quarter it completed the purchases of TowerPlace 200 in Atlanta and the Deerwood portfolio on Jacksonville. Late in the quarter, it also completed the purchase of its co-investors 70% interest in the three office assets located in Tampa, that were previously held in Parkway's funds and joint venture. And in March, Parkway entered into a purchase and sale agreement to acquire an approximate 75% interest in the U.S. Airways Building in the Tempe submarket of Phoenix.
While Paul Meurer, CFO of net lease retail REIT Realty Income, doesn't like to make quarter-to-quarter predictions for acquisition, but he's excited about how the year has started.
"Given really excellent transaction flow that we are seeing right now and what we did in the first quarter, which is a little more than we generally do, we are off to a very good start for the year," Meurer told analysts. "The first quarter as I mentioned, is a little slow. If you recall, last year I think we did $1.2 billion and I think we did $10 million in the first quarter. So at $128 million [in the first quarter of 2013], we view that as a positive."
"I also think that transaction volume at that this point, tells us this should be another very good year for acquisitions. We initially had in the guidance, $550 million. I can say now, and we are sitting in fairly early April but that should not be an issue for us," he said. "And we should be able to meet that and exceed that which is very much a positive at this time of the year."
While investment opportunities are fairly abundant, competition for these acquisitions is also abundant, Meurer noted. "There are plenty of well capitalized buyers in the market today led by private and public lease REITS, but we're also seeing some other private institutional buyers seeking yield in its space. These buyers are using more leverage with the CMBS market in our space that has gained strength in the past quarter or two. And that's helping our private buyers better compete," Meurer said.
Select Income REIT
Since Jan. 1, 2013, Select Income REIT has acquired five fully pccupied properties containing 779,000 square feet for an aggregate purchase price of $158.3 million at an average purchase price per square foot of $203.
Somewhat bucking the trend, Select Income's president and CEO David Blackman said the REIT has no pending acquisition opportunities under agreement.
"In fact, we have intentionally scaled back our acquisition pace to ensure we maintain our investment grade-like financial profile by not getting acquisition commitments ahead of our ability to raise capital," said Blackman. However, the REIT expects to reinvigorate its acquisition underwriting this quarter with new public fundraising efforts.
"The acquisition market remains vibrant, and we are confident in our ability to once again successfully make accretive acquisitions," he said.
SL Green Realty
New York office REIT SL Green Realty is looking at doing between $700 million or $800 million of acquisitions this year. For some properties, SL Green is pursuing participating in financing options.
"For the acquisitions we don't pursue, we attempt to turn them into structured finance opportunities," Marc Holliday, CEO of the REIT told analysts. The dual investment approach starts as evaluating acquisition opportunity, and if a deal doesn't work out, it switches gears.
SL Green Realty completed such an investment with the $925 million bridge acquisition financing arranged by it for New York City's iconic Sony Building at 550 Madison Avenue. The building, which is currently Sony's U.S. headquarters, was purchased for $1.1 billion. The financing matures with the expiration of Sony's leaseback of the property, and consists of a $600 million senior loan originated by Bank of China, a $175 million senior mezzanine debt which SL Green sold to a private investment manager and a $150 million junior mezzanine debt originated by SL Green. Following completion of the financing, SL Green sold one half of its interest in the junior mezzanine debt.
At the end of the first quarter of 2013, Stag Industrial owned 179 industrial properties, totaling 31.2 million square feet. The seven properties acquired by the company during the first quarter added approximately 6% of the company's total real estate assets over the previous quarter. On a year-over-year basis, the square footage of its own properties increased by 71%.
"Our primary investment strategy focuses on what we perceive to be marketing efficiencies and the pricing of our target properties," said Ben Butcher, chairman, CEO and president of the REIT. "This opportunity remains as we continue to be able to source accretive acquisitions and significant volume."
"In addition to our pipeline of deals that meet our investment criteria continues to be robust with approximately 600 plus million of potential acquisitions being reviewed and considered by our acquisition teams," he said. "This level of pipeline activity is unusually high early in the calendar year. As these acquisitions in our pipeline indicate, we remain very confident of our ability to maintain a vibrant acquisition pace through 2013 and beyond."
Steadfast Income REIT
This mixed REIT owned 34 multifamily properties in Midwest and Southern U.S. markets as of March 31. Its property portfolio consists of an aggregate of 7,654 apartment homes and 25,675 square feet of rentable commercial space. The cost of its real estate portfolio was $679 million.
Its most recent acquisition was a 224-unit residential property in Lake Bluff, IL.
TIAA Real Estate Account
While it made no acquisitions in the first quarter of 2013, TIAA Real Estate Account, the signature real estate account for Teachers Insurance & Annuity, views commercial real estate
as offering attractive returns over the short- and long-term vis-à-vis other asset classes.
Money continued to flow into the fund from participants at a steady pace during the first quarter, with the account ending the quarter with cash, cash equivalents and short-term securities representing 16.4% of net assets.
Management intends to manage the account's liquidity in a manner that maintains adequate reserves for new acquisitions. Its anticipated acquisitions program in 2013 will focus primarily on industrial, retail, and multifamily properties, and secondarily, on highly selective office properties.
Health care REIT Ventas Inc. said acquisition opportunities are really plentiful, and it has been as busy as it has ever been on that front.
"Acquisition opportunities abound in our large, fragmented health care and senior housing investment market," Debra A. Cafaro, chairman and CEO of Ventas, told analysts. "We see opportunities to add to our best-in-class senior housing operating portfolio, our medical office building business and a range of triple-net investment across the continuum of care. Our existing liquidity, balance sheet and diversification are highly supportive of continued external growth."
"I would say that when we look at the numbers, we could easily acquire over $1 billion, really -- and be very comfortable with our balance sheet without the need of any additional equity component," Cafaro said.
"We really want to continue to be in a position to take advantage of those opportunities, and at the same time, continue to move up the credit curve. So we would expect, over the course of the year, although our guidance does not include any acquisitions, we would be hopeful that over the course of the year, we will be able to get our fair share of additional investments," she added.
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