Of REITs: Public and Non-traded
By: Ellen Rand, contributing editor, Development
This has been a bumpy year for publicly-traded REITs, as Philip Hawkins, president and CEO of DCT Industrial Trust, told Development ‘11 attendees at a CEO Insight session. Despite the uncertain environment, DCT has been an active buyer, moving carefully up the risk spectrum as well as selling assets that are less strategic for the company. One property DCT acquired in Chicago had been 30 percent leased; now it is fully leased. It also has developments under way in Houston, Southern California and Miami and expects to build two during the first quarter of 2012 in the Washington, D.C. area with a partner.
Hawkins is confident that, “While things will slow down and we’ll be more cautious about underwriting, leasing is still active; there is no negative net absorption in our space.” DCT, which is active in the United States and Mexico, has a $3 billion market capitalization and leverage is at 50 percent. Critical to the company’s thinking is total return over time. It’s about basis in order to compete with other industrial REITs, private companies, institutions and pension funds. “We know we’re small but we’d better be fast. We build teams and give them the ability to respond without having to go through too many channels. We try not to make mistakes of inaction,” commented
Hawkins. The company does not have to access the debt markets in order to make acquisitions because it does deals in the $5 to $20 million range.
Looking ahead in five years, Hawkins noted, “I don’t see any seismic shifts in the industrial market. From an operational perspective, in five years we’ll be really happy we’re in this business.”
As for non-traded REITs, they have come in for their share of criticism because of their high fees and illiquidity issues. Thomas Roberts, executive vice president and head of real estate investments for Cole Real Estate Investments, said there will be new kinds of non-traded REITs that will offer a different model for this sector to address these issues. Among them are Clarion Partners Property Trust Inc. and American Realty Capital Daily Net Asset Value Trust Inc. Net asset value will be calculated daily, properties will be valued quarterly and shares will be tradeable.
Cole, which is an advisor to six non-traded REITs, at mid-year owned interests in, managed or had under development approximately 77.8 million square feet of properties leased to more than 860 customers, including 14.6 million square feet managed on behalf of three institutional joint venture partners. It will introduce a new open-ended fund based on a no-load mutual fund model, offering liquidity and involving asset management fees alone. The trade-off for investors? Instead of a 6 ½ to seven percent dividend yield, it is likely to offer 5 ½ to six percent. Roberts said that institutions as well as individuals are the target market for this new fund.
“Our goal is to bring institutional quality real estate to individual investors,” he said, pointing out that individual investors might have only one percent of their portfolios invested in real estate and that figure should grow to 10 percent. Roberts said that by year-end, Cole should have $10 billion in assets and hopes to have between $30 and $40 billion in five years.
Even with the fees and illiquidity, Cole has been raising significant investments from individuals over the past several years through broker-dealers at a rate of about $100 million a month. It has 120,000 investors – many of whom are retirees or aging baby boomers investing $40,000 to $50,000 – to whom 6 ½ percent looks like a good return.
Cole’s goal is to make $3 billion in acquisitions by yearend. It invests mostly in single-tenant retail, office and industrial properties, with a small percentage in multitenant retail and office.
John W. Guinee III
“We buy for all cash and finance [an acquisition] 30 to 60 days after the fact,” Roberts explained. Its debt cost is “very attractive” for five, seven or 10-year terms and acquisitions have been made at low eight cap rates.
To put the REIT world in perspective, John W. Guinee III, managing director of the investment bank Stifel Nicolaus, pointed out that at $350 to $400 billion, the REIT sector is roughly equivalent to Apple’s market capitalization.
Change in the Capital Markets
At a Development ‘11 session on “What’s Happening in the Ever Changing World of Capital Markets,” Brian Stoffers, president/capital markets for CBRE, predicted that national investment sales this year are likely to hit ’03-‘04 levels, or $55 billion of office properties, by year end. “It’s far better than last year, but we have a long way to go,” he said.
Greg Kraus, senior director and head of acquisitions for Invesco Real Estate, said that transparency of information has led to a herd mentality. “Being early in investment strategy is that much more important. You want assets that are competitive in their markets.”
Kraus advised, “You need to understand the drivers of specific markets. What markets are producer-driven, what are consumer-driven?” Producers include tech, biotech and healthcare, which are pretty good prospects for growth. Office, in the next three to four years, offers the best opportunity for outsize performance, he said, noting: “Multi-family has been a great ride but won’t last forever.”
A.G. Seifert, managing director of Cornerstone Real Estate Advisors, commented, “We’re lending in all food groups, including hotels. It’s all about basis. BLT: Basis, Location and Tenant Quality, not location, location, location.” A fourth key element is: What kind of borrower do you have? If interest rates rise, a lot of borrowers won’t be able to service their debt. Siefert said they have seen five and six cap rates for trophy properties. “The question is, does rent growth increase faster than the cap rate?”
What will be the catalyst to get more capital into the system? Siefert said it’s all about confidence: from consumers, lenders and corporations. Kraus observed, “We’re in the early innings of a massive deleveraging,” while Joseph Hoesley, vice chairman/ commercial real estate, U.S. Bank, remarked, “It comes down to jobs and employment.”
Distressed Real Estate: Where Is It?
The distressed real estate market has been described as the party that didn’t happen. At Development ‘11, Dominic Petrucci, COO/CFO of Buchanan Street Partners, said it is not doing portfolio sales, but is buying notes and paper for itself and its clients. About a dozen have been at an average discount of 48 percent to par value and half of those are performing. Small regional banks present good opportunities for these transactions.
Buchanan Street Partners, a real estate investment management firm, manages co-mingled and separate account real estate funds on behalf of institutional and private investors. Since its inception, Buchanan has invested and structured approximately $17 billion of capital in a broad range of equity and debt real estate investments throughout the United States.
Steve Pumper, executive managing director for Transwestern, expects to see an uptick in REO and special servicing in the next two to three years. Local banks “have a lot of $3 million assets and land,” One $31 million deal Transwestern has done, working with a special servicer, took 45 days and involved a seven-year-old property in Dallas that was 75 percent occupied.
Petrucci, noting drops in pricing since the summer, remarked, “We’re back to a protracted recession where pricing is uncertain. Spreads are up 100 to 150 bps and pricing is down.” He expects the uncertainty to continue over the next year. As for cap rates, it will be a tale of two cities – staying where they are in coastal cities, but up in secondary and tertiary markets.
Pumper advised attendees, “If you have a good plan for an asset and believe in it, make some good strategic bets in the next 15 to 18 months. This is your time. As institutional investors are risk-averse, there will be wonderful opportunities.” Petrucci agreed, stating, “Buy it, have some patience and in three to six years we’ll all be happy.”