Recovering Commercial Real Estate Sale Prices Give Management Teams Weary of Being 'Jacks of All Trades' Another Incentive to Sell Non-Core Buildings, Recycle Cash Into More 'Focused' Investments
In the early 2000s, diversification was the big buzzword among REITs, which touted investments in different commercial property types or markets as a smart hedge against risk. Today, being a 'pure-play' investment is all the rage.
More REITs with diverse commercial real estate
holdings are stepping up their efforts to specialize in one specific property type or a limited number of markets, and divesting large portfolios of non-core assets in doing so.
The sell-off is fueled by investment analysts who have stepped up their calls, using terms like 'simplify' and 'focus,' for REITs to pare back assets that are not strong suits. Equity analysts argue that a clear understanding by investors of a company's story is especially critical during this year's stock market turbulence, in which share prices are beginning to stabilize after a rough several months.
The prices that REITs can currently command for assets in many markets is a huge incentive for sellers, practically forcing the hand of management teams to dispose of properties deemed not part of their core portfolios, said Michael E. Straneva, partner and Americas Real Estate Sector Leader for Ernst & Young. Commercial property pricing and sales have rebounded steadily on a annual basis, although pricing growth took an "August recess,"
according to the latest CoStar Commercial Repeat Sale Indices (CCRSI) report.
"The quandary for REIT executives is that everything is so perfectly priced, that they are getting many unsolicited bids for buildings and property they may not really want to sell," Straneva said.
REITs were one of the few investors with access to capital in the Great Recession and were able to buy prime assets at opportunistic prices in strong markets with the intent of repositioning and eventually driving up rents. Buyers are now willing to pay so much for quality assets, however, that REIT execs have to decide whether to hold, or sell and recycle their capital into late-recovery markets, Straneva said.
Another factor in the move to specialize is a desire for greater transparency by large pension funds and insurance companies with funds allocated to real estate, which want to more clearly understand the mix of properties in their investment portfolios, he said.
"If [institutional investors] are going to create a basket of properties and they think we’re in the 7th inning of a multifamily recovery, but in the first inning of the office recovery, they may want to pursue pure-play office. How can they do that if they’re [invested] in a diversified REIT?" Straneva said.
Such companies as Vornado Realty Trust (NYSE: VNO
) and Weingarten Realty Investors (NYSE: WRI
) have been actively selling non-core assets for years.
What's a Diversified REIT?
The characteristics that define a diversified equity REIT can vary by sector, geographic market and classification by industry groups and analysts.
NAREIT (National Association of Real Estate Investment Trusts) lists 25 REITs in the diversified category of the FTSE NAREIT All REITs Index. Diversified REITs with a total market capitalization of $51.7 billion as of July 31, constituting 7.7% of companies in the index.
Vornado is by far the largest company in the group, with a market cap of $30.53 billion as of July 31, according to NAREIT data.
Citi designates nine diversified REITs among the companies it covers, including Washington REIT (NYSE: WRE
), which is exiting the medical office business to refocus on its core office, apartment and retail assets.
Other diversified REITs on Citi's list include Cousins Properties (NYSE: CUZ
) and Forest City Enterprises along with newer player like Silver Bay Realty Trust (NYSE: SBY
) and Select Income REIT (NYSE: SIR
In the lodging sector, Hersha Hospitality Trust's agreement last month to sell 16 non-core hotels to an affiliate of Blackstone Real Estate Advisors for $217 million marked the lodging REIT's exit from the Long Island, NY, and suburban Philadelphia markets, along with remaining properties in Connecticut and Rhode Island.
The planned sale "completes our transformation into a pure play, urban transient portfolio with exposure to some of the highest demand gateway markets in the United States," Hersha CEO Jay Shah said.
Shah noted that the timing of two portfolio sales capitalizes on private-equity capital's interest in stabilized select-service assets in the suburbs. Among other purposes, cash from the latest sale will be recycled into "higher growth opportunities in Miami and the West Coast," he said.
Cousins, meanwhile, is shedding shopping center properties as it implements its strategy "to exit non-core holdings and focus on Class A office properties and opportunistic mixed-use developments."
The REIT two weeks ago announced the unwinding of two retail joint ventures consisting of eight retail centers totaling 2.1 million square feet in four markets. and the sale of a power center to Prudential Insurance Co. of America, which previously held an 89% stake, purchased Cousins’ interests to become sole owner.
In the other hand, retail landlord DDR Corp. (NYSE: DDR
) is increasing its pure-play cachet by buying out a joint venture partner. The REIT on Oct. 1 closed the acquisition of a portfolio of 30 power centers from its existing joint venture with Blackstone Real Estate Partners VII L.P.
The company said the $1.46 billion acquisition reduces its joint venture assets by 20% and generates higher-multiple long-term cash flow, along with strong growth potential in a shopping center sector where DDR excels.
"This investment further demonstrates our commitment to improve the quality of the prime portfolio while simplifying our story and enhancing our earnings composition," said Daniel B. Hurwitz, chief executive officer of DDR. "Our deep knowledge of the assets reduces risk and gives us confidence in the long term growth profile of the assets."
CommonWealth REIT on Oct. 1 announced plans to accelerate the sale of its non-core suburban office and industrial properties.All 94 of those assets that were listed for sale earlier this year have been sold or are under contract, and the company has plans to sell an additional 110 non-core properties with a net value of $771 million.
"When the 110 properties recently identified for sale are sold, the portfolio repositioning that the company began several years ago will be substantially completed," CommonWealth President Adam Portnoy said.
Abandoning Warehouse Boxes for Store Boxes
Shopping center REIT Kimco Realty Corp. (NYSE: KIM
) recently exited the industrial market. Kimco dabbled in both warehouse and multifamily residential assets earlier in the cycle, but now wants out.
Terrafina, a leading Mexican industrial REIT, earlier this month completed the acquisition of Kimco's 84-property Mexican industrial portfolio, owned in partnership with American Industries, for $604 million.
"We truly believe that the non-retail aspect of the company is now almost completely behind us, and our energies can be totally focused on delivering strong operating metrics and significant improvements in the demographics and profile of our high-quality retail property portfolio," Kimco President and CEO David Henry told investors recently. "We're committed to continuing our recycling efforts whereby low-quality, secondary market assets will be sold and replaced with high-quality properties in our core primary markets."
Shopping center owner and developer Weingarten had completed the transition to pure-play retail by exiting the industrial business last November, closing the sale of nine warehouse properties totaling 2.6 million square feet.