Veteran Executive Expounds On Market Strategies As Well As Recent Business And Regulatory Forces Shaping REITs
After 14 years of executive experience at Federal Realty Investment Trust -- including nearly a decade as president and CEO -- Donald C. Wood occupies a position of even greater prominence and influence within the publicly traded REIT space.
Wood is the current chairman of NAREIT (National Association of Real Estate Investment Trusts), giving him a unique market vantage point and voice in the changes rippling through both publicly traded and private REITs. He joined Federal Realty (NYSE: FRT
) in 1998 as chief financial officer and served as senior vice president, chief financial officer and COO beginning in 1999, and president and COO in 2001 before taking the helm as CEO in 2003.
His entire career is intertwined with the public markets. Prior to FRT, Wood served as SVP and CFO of Caesars World, Inc., a wholly owned subsidiary of ITT Corp.
Under Wood's stewardship, Federal Realty has produced steady earnings growth utilizing a low-risk and well-hedged business strategy. Federal Realty has a portfolio that contains about 19.2 million square feet located in select metros across the country. In addition to his position with NAREIT, he is also an active member of the International Council of Shopping Centers (ICSC) and serves as the chair of several Washington, D.C. area service and philanthropic organizations.
CoStar caught up with Wood on July 16, the date of the ground breaking of Pike & Rose, the repositioning project for Mid-Pike Plaza on 24 acres in Rockville, MD. It was also the day that pricing was announced for FRT's $250 million offering of senior unsecured 10-year notes to repay debt under its revolving credit facility and for potential acquisitions and redevelopment opportunities.
CoStar: It’s been a busy time for Federal Realty, with the ground breaking of Pike & Rose, which is expected to include up to 3.5 million square feet of residential and commercial space at build out. And then there was the pricing meeting for that unsecured debt offering.
It’s been a good day all around. In addition to Pike & Rose, we were in the market to price unsecured debt and we just raised $250 million at a great rate. It settles three days from now, but its $250 million at basically a 3% coupon on 10-year unsecured debt, which is great.
Are projects like Pike & Rose evidence that selective development opportunities are returning in the retail and mixed-use space?
Projects are returning, but projects like Pike & Rose and Assembly Row aren’t in the same category as some of the merchant development that has had such a difficult time since the recession. We’ve owned these shopping centers and this land for years and years. Because we’ve been around a long time and our land basis is reasonable, we never put these projects on hold during the recession.
You can’t wait for things to be better or try to 'time' development, because it takes five to seven years to get it done. If you’re building for the long term and are in the right locations, it makes sense to keep going through the cycle. If you’re trying to build something to flip, that’s a whole different business. The whole merchant building business is one that I’m glad I’ve got nothing to do with.
How do you evaluate the current velocity of new supply in retail commercial real estate compared with history?
My point of view may be a little different than many guys, but the bottom line is this country is over-retailed. There is too much retail space
for the demand. That obviously doesn’t apply to everywhere. But a lot of the retail square footage out there is not particularly desirable to retailers.
As a buddy of mine puts it, "we’re not over-retailed, we’re under-demolished." Either way, there is an imbalance between the existing retail gross leasing area and demand. Consequently, most of what we’re doing in development is mixed use. That’s because I’m a firm believer that transit-oriented urban development in densely populated areas where you can live, work and eat without being dependent on a car is very important.
These projects cost more and are more complicated, and there’s more that can go wrong. But when they work, you can get a real premium to the rents compared to competing product. In the few places we are building -- and few is the right word because there are not a lot of opportunities like this -- we’re trying to provide the right product for the next 20 years, not the last 20 years.
That’s a good segue into the next question. Has your company seen a tangible effect from Internet commerce on the demand for bricks-and-mortar stores?
I’m not saying that mixed use is the perfect hedge against online shopping. But online shopping is here to stay, and there will be a piece of our business that happens online, and that will continue to grow. As a bricks-and-mortar real estate guy, the best way to hedge against that is to make sure that any retail real estate we own is not same-old, homogeneous stuff.
We were never in that business, but gone are the days when you would follow the growth and put up a new cookie cutter grocery anchored shopping center at every new housing development every two or three miles. The problem is you can’t differentiate one from the next. And if you can’t, how will you have any pricing power? How can you find two players that have to be in that particular place and space that will fight to pay more and more rent to get into that space, if it’s the same as any other?
The good thing is our business is a local business. And the bottom line is, in a local business, you use the phrase "it depends" a lot. It depends on what type of product you’re building or buying based on a particular community’s needs. The most significant differentiator is not the right trees and amenities as much as it is the right merchandising -- how to put the right retailers next to one another that encourages cross shopping in a place that a retailer can’t get that kind of mix anywhere else. That’s what drives tenant sales, which in turn drives rent.
Does that explain why some retailers pursuing smaller footprints, such as the case of Best Buy, which is scaling down from big boxes in some markets to smaller stores and even kiosks?
Sure, that’s fair. That being said, however, I would choose a big-box center in the greatest location in the U.S. or world over a really sexy mixed-use center way out in a tertiary suburb. In our business, it’s hard to make a wide paintbrush statement of ‘bad big box, good mixed use’ because it depends. The key is supply and demand by retailers and building them the right product, which is very dependent on location.
We seem to be seeing an acceleration of the trend away from diversified REITs, with more REITs opting to move toward pure-play office or industrial REITs. Why do you think this is happening?
I’m not sure how new it is. I can tell you as a public company trying to reach your investor base, the more transparent and simpler the company is to understand, the more likely it is to get a higher multiple on its earnings in trading, if you do it well.
It is really hard for investors to understand a company that’s hot in its residential piece but cold in its office piece, maybe they’ve got industrial, a few. There clearly has been a very deliberate emphasis on pure play. And Federal Realty helped out on this.
We trade at a very high multiple because people know what they’re going to get and know the quality of the real estate is high. We basically own the real estate and don’t have a lot of joint ventures and other things that complicate the deal. Simplicity, transparency and quality work. We try really hard to have a very balanced approach in our growth between development, acquisitions and income from our core portfolio. In the public REIT space, it is about predictability, transparency and balance in what is naturally a cyclical business.
REIT IPOs have been having a difficult time in the market, but that hasn’t stopped talk of other companies going public, most notably reports that Blackstone could spin off its office portfolio as a public company. How to you view the market for new REITs?
A REIT is a real estate operating company, just like any other type of company. There are good companies and bad companies. A number of companies effectively try to go public when they’re not really ready. Whether they’re REITs or C-corps or anything else, it’s really hard to compete if you’re too small. And it’s also really hard to do it if you’re too big, because your earnings are flat and it’s hard to move the needle.
You’ve got to have a reason to exist in the public market. Investors have to be able to say, that company would be the highest quality retail company, or this company would be a great geography play for the Northeast in office. Investors have to be able to say, "I get it," as opposed to investing in company just trying to find an exit and get their shares out in front of the public.
Those deals are not going to trade well; in fact they may not be able to get done at all. It doesn’t have as much to do with REITs specifically as it does with deciding which companies belong in the public market. It’s all in the business plan. You’re asking investors to invest and you’ve got to sell them on why.
Do you think the attempts of non-publicly traded REITs to offer more transparency and moves to provide a degree of cash flow for investors can help elevate them in the eyes of regulators and investors?
They are making important moves. I think it’s great that an individual investor has the opportunity to invest in a privately traded REIT vs. a public REIT, or any other potential investment. Transparency has to happen. When you’re trying to get the money, that investor must have full information. One of the things I’m involved in at NAREIT, something that I really feel good about, is trying to get together with the non-publicly traded REITs and trying to gain that type of transparency.
Again, there are well managed companies and not-so-well managed companies, just like in the public space. It’s a great move by them to improve their reputations in the eyes of regulators and make their investment offerings, including management fees, make sense. Whether they’re able to fully get there, I don’t know. It’s about changing habits. There are guys who made a lot of money using a particular business plan, and now they’re being asked to modify that, and it can be hard.