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Early Returns Show REITs Starting 2014 On Strong Note

First Round of Earnings Reports Indicate Strong Property Fundamentals Generally Overcoming Hit from Bad Weather, Meandering Pace of Economic Recovery
April 30, 2014
Nearly a year after nagging concerns over rising interest rates and other economic factors put a damper on REIT stocks, returns among the publicly traded pproperty owners have started edging up again through the first four months of 2014.

Year-to-date equity REIT returns were up nearly 13.2% through April 29, according to the FTSE NAREIT Equity REITs Index. Mortgage REITs have also turned around strongly, with returns increasing about 12%.

Year-to-date total returns have been led by self-storage at 18.58%; health care, 16.65%; apartments, 16.2%; office at 13.25%, mixed REITs, 12.53%, retaill, 12%, and industrial, 10.90%. Lodging REIT shares increased 8.4% through April 29.

Despite a harsh winter that dampened construction and business activity, and turned up in the remarks of almost every CEO over the past week during first-quarter financial results, most REITs are benefiting from improving market fundamentals.

"Our takeaway from earnings so far is that fundamentals in most markets are starting to gain increased traction and even weaker markets are starting to bounce along the bottom," said Citi REIT analyst Michael Bilerman. "Industrial fundamentals were generally as expected, with trends strengthening across the U.S. Investor demand for higher cap rate secondary market assets seems to be picking up, which creates the potential for an acceleration of asset recycling, and competition/pricing for core assets remains high."

With first-quarter earnings generally in line with the expectations of Wall Street so far, commentary from CEOs of leading REITs representing each of the major property types was generally upbeat.

Driven by strong leasing activity, funds from operations (FFO) for Simon Property Group (NYSE: SPG) was up 16.1% from the first quarter of 2013, significantly exceeding the consensus estimate for the world’s largest mall and shopping center company, according to Chairman and CEO David Simon.

"Our growth strategy continues to generate significant value for our business; overall business conditions are positive," Simon said. "Demand for space in our portfolio remains strong."

Simon’s occupancy rose 80 basis points from first-quarter 2013 to 95.5%, with re-leasing spreads accelerating to $9.90 per square foot. NOI growth for malls and outlets was 3.7%, despite higher utility and snow removal costs, Simon said.

SL Green Realty Corp. CEO Marc Holliday noted that the company's Manhattan leasing results exceeded expectations, with hefty volume reflecting accelerating demand by a diverse group of tenants as private-sector job growth continues in New York City at a historically rapid pace.

"The good news is I don't think there's a single theme to the demand that's out there right now, meaning that it's not limited to one part of town or one size of tenant the way it was a year or two ago," added Steven Durels, executive vice president and director of leasing. "We're seeing tenants of size, large tenants that are out in the market, some driven by growth, some driven by expirations, some driven by consolidations."

Development pipelines continued to be a major focus of the REITs. Boston Properties Inc. signed a 714,000-square-foot lease, allowing development of the newly dubbed Salesforce Tower at Transbay to move forward. BXP also reported leasing progress on its projects at 535 Mission tower in San Francisco and 250 W. 55th in New York City.

ProLogis Chairman and CEO Hamid R. Moghadam also reported a strong first-quarter results across all industrial business lines and geographies, with rents and occupancies recovering at a faster pace than forecast last fall.

"U.S. absorption is running more than double the pace of new completions, pushing occupancies above pre-crisis levels," Moghadam said. "We expect this trend to continue throughout 2014, albeit at a more modest pace."

Although speculative starts in Dallas are getting ahead of demand, ProLogis generally sees no signs of overbuilding.

"There is also a fair amount of new construction in the Inland Empire and Houston, but we are not concerned about those markets as absorption is more than keeping pace with new supply," he said.

Prologis sees strong capital flows and significant investor demand for quality warehouse real estate and is putting more of its non-strategic assets on the market for sale in 2014, given the strength of U.S pricing, Moghadam said.

With respect to U.S. acquisitions, "we are only spending time on transactions where we can have a competitive advantage in terms of our scale and our expertise or see value at discounts to replacement costs, he said.

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