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REITs Projecting to be Big Net Sellers This Year

Plan A for Many REITs in 2016: Sell Property at Peak Prices, Use Proceeds to Fund Development and Acquisitions
February 10, 2016
A review of 2016 acquisition and disposition activity for 2016 finds a majority of the nation’s publicly traded REITs and real estate companies expect to be big sellers of properties this year, with the projected total of property dispositions more than double that of acquisitions.

In addition, three times as many REITs are projecting to be net sellers compared to net buyers in 2016.

The majority of publicly traded REITs and real estate companies have now posted their year-end and fourth quarter earnings and provided outlines for their 2016 guidance.

Based on CoStar’s research of 80 of these reports, it’s clear that many are looking to fund their acquisition, development and redevelopment pipelines through property sales.

While not all such firms provide full 2016 guidance, almost half of the publicly traded equity REITs have done so thus far. Those companies disclosed they expect to sell slightly more than $20.7 billion in properties compared to $9.8 billion in expected acquisitions.

By far the biggest net-seller is Sam Zell’s Equity Residential. The multifamily REIT is projecting to sell $7.4 billion in properties this year, more than one third of the combined total reported by REITs so far. Equity Residential said it plans to buy just $600 million in property at the high end of its 2016 guidance assumptions.

A big chunk of that sell-off for the year has already been completed. Last month, the company completed the sale of 72 properties consisting of 23,262 apartment units to affiliates of Starwood Capital Group for $5.365 billion, or approximately $230,634 per unit on average.

"This disposition accomplished several things for us,” said David Neithercut, CEO and president of Equity Residential. “We realized very good pricing on assets in markets not considered core for us and on some assets in our core markets that didn't quite fit our long-term strategic vision.”

The decision to sell such a large portion of its $23 billion in assets also reflects the challenge the REIT saw in trying to recycle $6 billion of capital in today's marketplace with prices driven up by competition from private equity and institutional investors, Neithercut added.

The REIT it plans to use the selloff this year to refocus its portfolio into higher density urban locations with close proximity to public transportation and job centers. Equity Residential has 10 properties currently under development totaling nearly 4,000 units at a cost of $2 billion.

Development and redevelopment costs play a big part in the top five projected net sellers of property.

Top Five Projected Net Sellers

Company -- 2016 Acquisition Guidance -- 2016 Disposition Guidance -- Difference
Equity Residential -- $600,000,000 -- $7,400,000,000 -- -$6,800,000,000
Prologis -- $700,000,000 -- $2,200,000,000 -- -$1,500,000,000
Liberty Property Trust -- $100,000,000 -- $1,200,000,000 -- -$1,100,000,000
Brandywine Realty Trust -- $0 -- $850,000,000 -- -$850,000,000
Macerich Co. -- $330,000,000 -- $1,054,000,000 -- -$724,000,000
Prologis has $2 billion of properties under development totaling 25.5 million square feet.

In the fourth quarter, Liberty Property Trust completed five development properties with a total cost of $75.3 million and totaling 678,000 square feet in leasable space. And it began development of five properties totaling 806,000 square feet of leasable space at a projected investment of $107.6 million. And it had another $252 million of development projects in progress.

"Even though the year started with choppy financial markets, we continue to benefit from a very strong real estate market and we expect 2016 to be another very good year," said Bill Hankowsky, chairman, president and CEO of the REIT, citing "strong demand from the investment buyer universe."

Another Pennsylvania-based REIT, Brandywine Realty Trust, substantially completed its portfolio repositioning last year. In the last 13 months, it racked up $1.1 billion in property sales. That included this week's disposition of 58 office properties (3.9 million sf) to Och Ziff Capital Management Group LLC for $398.1 million. The transaction marked Brandywine’s exit from the Richmond, VA, market while also reducing its New Jersey holdings by 44% and trimming back its holdings in non-core suburban Philadelphia assets.

“Our overall disposition efforts have resulted in a significant reduction of our non-core holdings in Pennsylvania, New Jersey, Delaware, Richmond and Northern Virginia," stated Gerard H. Sweeney, Brandywine's president and CEO. "In addition, these transactions significantly increase our financial capacity, reduce debt and provide ample liquidity for our development pipeline."

Last quarter, Brandywine entered into a fee development agreement with Subaru to construct the car maker's North American headquarters, containing 250,000 square feet in Camden, N.J.

Top Five Projected Net Buyers

Company -- 2016 Acquisition Guidance -- 2016 Disposition Guidance -- Difference
Douglas Emmett -- $1,340,000,000 -- $0 -- $1,340,000,000
Physicians Realty Trust -- $1,000,000,000 -- $0 -- $1,000,000,000
Store Capital -- $750,000,000 -- $55,500,000 -- $694,500,000
Essex Property Trust -- $600,000,000 -- $300,000,000 -- $300,000,000
SL Green Realty -- $1,000,000,000 -- $750,000,000 -- $250,000,000

The top projected net-buyer, Douglas Emmett, did not provide assumptions on property dispositions but yesterday the Los Angeles-based REIT did make a major buy, announcing an agreement to acquire a portfolio in the city's Westwood section consisting of four office buildings, totaling just over 1.7 million square feet, for $1.34 billion.

Meanwhile, Physicians Realty Trust more than doubled its gross real estate assets in 2015.

"We anticipate similar growth in 2016, as we expect to complete, including the pending investments announced today, between $750 million to $1 billion of total real estate investments in 2016, subject to favorable capital market conditions," said John T. Thomas, president and CEO of Physicians Realty.

Physicians Realty announced five pending acquisitions of seven health care properties in five states for $100 million.

Essex Property Trust currently prefers multifamily acquisition to development in its California markets.

"So far acquisition markets have experienced little impact from global economic conditions, cap rates have not moved much. At this point, A quality property and locations trade at around a 4.25% cap rate using the Essex methodology, but more aggressive buyers are often sub 4%,” said Michael Schall, president and CEO of Essex Property Trust.

On the development front, Schall said he saw three significant potential headwind sources: construction lenders are tightening up their lending; cities are increasing demands from developers in the form of low income housing units; and construction costs have increased around 10% in each of the of past two years as skilled labor forces are inadequate to meet related construction activity.

Despite warning investors that Manhattan CRE may be coming down from its peak this year, SL Green Realty’s CEO Marc Holliday still thinks there is some good buying opportunities in that market. But Holliday said the New York office REIT will be picky.

"What it implies is that we believe that this year we might see one or two interesting opportunities, to exercise on them, maybe. And if we do, we'll do it in a way where they are either funded entirely by sales or with JV equity," Holliday said. “We're going to be very, very discerning on our purchases as we always are, at this point in the market.”

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