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REITs' Wallets To Remain Wide Open in 2014

Property Spending Projections Significantly Outpace Projected Dispositions By Biggest Publicly Traded Property Owners
March 5, 2014
The nation’s REITs look to continue to be big spenders again in 2014, with the projected pace of acquisitions and expenditures on new development running almost 60% higher than their pace of projected dispositions.

The majority of REITs have now posted their year-end earnings and provided 2014 guidance outlines. Based on CoStar’s research from those reports, it’s clear they continue to plan to be very active in the capital and investment markets. While not all REITs provide full 2014 guidance on their acquisition, disposition and development pipeline, about one-third of the publicly traded equity REITs do.


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Development Driving a Big Share of the Spending


Prologis and W. P. Carey Inc. had the most aggressive spending plans for this year at $3.2 billion and $1.6 billion, respectively.

Prologis projected buying up to $1 billion in properties worldwide this year. In addition, the industrial REIT also is projecting to be one of the largest spenders for new property development, reporting plans to start development on $1.8 billion to $2.2 billion in new projects.

“The way we forecast development volume is that we look at the visibility that we have on deals that are pretty much in the bag,” said Hamid R. Moghadam, chairman and CEO of Prologis. “We're pretty good with the number, particularly at the lower end of the range. Not that many good things have to happen during the year for us to be able to exceed that. I guarantee you this, if there are good development opportunities in markets that we see that we think we can capture, we're going to take advantage of those,” Moghadam added.

“Most markets are still not at the level where with today's rents, you can generate acceptable margins. I think that situation will change very quickly. So maybe our numbers for the back half of the year are too conservative. Time will tell," he said.

W.P. Carey said that about $200 million of its projects spending will be for its own accounts while the majority $1.4 billion will be for the net-lease REITs it manages.

Also projecting as big spenders this year with plans to buy or build more than $1 billion worth of real estate were AvalonBay Communities and Digital Realty Trust at $1.5 billion and $1.2 billion respectively. For both REITs, the biggest chunk of those amounts is for new development.

“Development starts were up almost 50% over 2012, at about $1.3 billion. And most of it is already capitalized or match funded with attractively priced capital as we raised a significant amount of capital through dispositions at sub 5% cap rates this year (2013) and debt at sub 4% on average,” said Timothy J. Naughton, chairman, CEO and president of AvalonBay. “We added over $2 billion of attractive development rights this past year, including $700 million from the Archstone transaction, which provides future growth opportunity.”

Going forward, Naughton said, the apartment REIT is seeing some softening in New York in the back half of last year, and expects that market to continue to decelerate based on the supply demand characteristics.

Digital Realty too said it is starting to see some slowdown in some of its markets and is trimming its development spending from last year. The international data center REIT projected to spend up to $950 million last year and has reduced that to $800 million this year.

Other big development budgets were projected by Alexandria Real Estate Equities and Brookfield Office Properties.

The high-end of Alexandria’s budget was $625 million. The REIT said its Seattle market has been experiencing pent-up demand from the tech sector and has development opportunities there in the heart of South Lake Union market.

Brookfield Office Properties said that it would fund its $600 million in projected development with an equal amount of dispositions and is projecting no new acquisitions.

“In 2014, we're focused on creating as much value as possible from those growth initiatives undertaken last year and also, in some prior years,” said Dennis H. Friedrich, CEO of Brookfield Office Properties. “That's going to mean making meaningful leasing, financing and asset management progress throughout our global portfolio. It's about blocking and tackling in what we see as an improving environment and feeding off of the leasing success we achieved in the fourth quarter in particular. There continue to be rental uplift opportunities in our portfolio that our teams are going to push hard to capture.”

Eye Towards Buys


Apartment REIT UDR has budgeted up to $780 million in spending for 2014 with $480 geared toward new development and $300 million to acquisitions. Some of that acquisition activity is likely to be for land new developments or for properties for redevelopment.

Other notable spenders on the acquisition front include: EPR Properties and Extra Space Storage, which each see themselves buying a half a billion dollars or more in new properties.

EPR said the bulk of its acquisitions will be from build-to-suit projects.

“Extra Space is positioned to have a strong 2014. We see continued organic growth and a favorable environment for acquisitions,” said its CEO, Spencer Kirk. “This is evidenced by the $304 million either purchased or under contract so far this year. Fundamentals remain strong and there continues to be limited new supply. That has become even more evident that smaller operators are struggling to keep up with more sophisticated operators online, especially when it comes to acquiring customers through mobile devices.”

In goes hand-in-hand that if there is a lot of spending being projected, that there is also a high level of disposition activity being projected, in part to help fund the new deals.

Net Sellers


Camden Property Trust is projecting to sell up to $650 million in properties, while currently only looking at spending $100 million for new acquisitions. D. Keith Oden, president of the apartment REIT said some of that spending will be in Atlanta.

“We made one really significant investment acquisition in Atlanta last year and we think we caught it just about right,” Oden said. “It was about an $80 million investment and then we've got our development at Buckhead that's underway right now and that's a very significant development opportunity for us. So we're putting capital to work in Atlanta and we think we've done it at the right point in the cycle.”

FelCor Lodging Trust, which has been undertaking a significant portfolio repositioning, is looking to continue in that mode this year.

Since December 2010, it has sold 25 hotels. This past January, it sold the 232-room Embassy Suites hotel in Atlanta for $17.2 million and has agreed to sell a 218-room Embassy Suites hotel in Bloomington, IN, for $24 million.

FelCor has 20 more hotels in its portfolio it considers non-strategic, including the one hotel that is under contract. Of the remaining hotels, it is currently marketing six and expects to begin marketing three more later this year.


Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published Monday mornings.


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