REITs (Real Estate Investment Trust) are enjoying a much-improved financial landscape since recapitalizing in the wake of the credit and financial crisis two years. And the upbeat mood was evident in presentations at REITWorld, the annual main event for the industry held by the National Association of Real Estate Investment Trusts (NAREIT) this week in New York City.
About 1,300 commercial real estate professionals attended the convention at the Waldorf-Astoria this year, where NAREIT observed the 50th anniversary since legislation that created REITs was signed into law by President Dwight Eisenhower (as part of a bill to extend the cigar excise tax in 1960.) The conference offered industry veterans a nostalgic look back at the evolution of investment trusts, which emerged as a major U.S. investment vehicle in the early 1990s and appear to have weathered the Great Recession in better shape than many of their privately held counterparts, thanks in large measure to their ability to raise capital in a credit-constrained environment.
After pausing for a few moments to savor the present, executives on the first day of the conference rolled up their sleeves for a post mortem of the boom cycle and the past two very difficult years for the real estate industry, and discussed strategies for moving REITs forward by learning from the mistakes and excesses of the past.
"REITs have emerged from these crises stronger than ever, demonstrating resilience, liquidity and access to public markets," said Debra Cafaro, Ventas Inc. chairman and CEO and outgoing NAREIT chair, adding that REITs raised $35 billion of fresh capital, including $20 billion of new equity, in the first 10 months of 2010. That's on top of the $35 billion raised in 2009 as a wave of recapitalizations helped trusts clean up their balance sheets and sparked a sharp rally in share prices for many companies.
"We're raising capital in an environment where credit remains extremely tight and limited access to capital and approaching debt maturities continue to cause stress among private real estate owners," Cafaro added.
REITs have prudently deleveraged and the industry debt ratio stands at a very strong 40% of total enterprise value -- vastly improved from the 66% at the trough of the down cycle in March 2009, Cafaro said. This year, REITs have switched to offense, accounting for more acquisition volume than private equity funds, institutions and foreign investors, a trend expected to accelerate in the next couple of years.
"In 2010, we're witnessing a dramatic reversal of outmigration of commercial real estate assets from public to private hands," Cafaro said.
More sobering sentiments emerged on the second day of the conference, with executives such as Steven Rogers, CEO of Parkway Properties Inc., and David Simon, chairman and chief executive of Simon Property Group (NYSE:
SPG), concerned about the relatively slow rate of job growth. The growth of REITs "is going to be a challenge for the industry in what most people see is a slow recovery," Simon said during the "REITs at 50" panel, which also included Evercore Partners Managing Partner Marty Cicco; Milton Cooper, executive chairman of Kimco Realty Corp. (NYSE:
KIM), and Colony Financial Inc. (NYSE:
CLNY) President/CEO Richard Saltzman.
During the morning general session on day 2, Rosen Real Estate Securities Chairman Kenneth Rosen warned that REIT stock prices will likely decelerate from their rapid surge in 2010 to a slower, grinding climb that mirrors the broader economy. Jobs will be "the single-most important factor for everyone," noted Rosen, who moderated the session on the state of the economy.
Also, several executives during different sessions lamented that the industry still hasn't succeeded in broadening its equity base. Nearly two decades since trusts first emerged as a major investment vehicle, pension funds still prefer direct investment over indirect investment in securities through REITs.
AvalonBay Communities Inc. CEO Bryce Blair, incoming NAREIT chair, said REITs "need to do a better job of telling the industry's story and communicating the benefits to pensions and other institutions that remain significantly under-invested in REITs." he average pension fund has only about 5% of its real estate portfolio invested in publicly traded real estate securities. Convincing the pension fund community to increase REIT allocation could be a tremendous source of growth, Blair noted.
However, REIT executives representing the office, apartment, retail and self-storage sectors agreed that overall market fundamentals look good and the way forward looks far more promising than a year and especially two years ago. Glimcher Realty Trust CEO Michael Glimcher said occupancy, leasing and net operating remain surprisingly strong in retail despite less-than-stellar consumer spending.
With yields on U.S. Treasuries below 4%, most executives foresee continued property acquisitions by REITs, even as capitalization rates have fallen below 5% for some high-demand sectors such as core apartment properties. Cap rate compression is also prompting some developers, especially in apartments, to restart their development programs, said AvalonBay Communities Inc. CEO Bryce Blair, who moderated the ever-popular "CEO Marketplace" discussion,
REITs will likely continue to grow through initial public offerings, with companies that were acquired by private firms during the real estate boom taking a serious look at re-entering the public markets, Cicco said. A couple of familiar names that went private a few years, Archstone and Equity Office Properties, could be potential IPO candidates.
Scot Sellers, chairman of Archstone, which went private when Archstone-Smith was acquired by Lehman Bros and Tishman Speyer in 2007, said status as a publicly traded company now provides better access to capital and the ability to intelligently deploy that capital across a very wide spectrum of options than for private companies.
Asked by Blair whether Archstone would go public again, Seller said, "Only the owners know for sure," and added, "My guess is at some point that's an attractive way to monetize their investment."
Martin Cohen, co-chairman & co-CEO of Cohen & Steers Capital Management, said that the current cycle has reminded the industry that a strong business plan, great organizational and financial skills are the key to sustained success.
"On the financial side, we've all learned about what proper balance sheet management is -- it's a lesson that seems to be relearned every five to 10 years, but I think the industry has got it right this time." With a well-managed balance sheet, "the access to capital is absolutely extraordinary; it beats just about any other real estate entity on the planet," Cohen said.
"The heart and soul of our business is capital allocation in my opinion," Sellers said. "One of the beauties of publicly traded real estate is you can constantly take advantage of opportunities to allocate capital expeditiously or opportunistically."
During the financial crisis in 2008 and 2009, Cohen said he tied to convince CEOs that "if you raise capital, it will demonstrate to the market that you are a survivor, and being a survivor in this era will make you that much more prosperous in the period that follows."
Many companies were skeptical of that at first. Cohen & Steers offered to make substantial lead investments in offerings and a couple of companies had the courage to go to the market, and once companies saw the positive effect on their share prices, it got the ball rolling, Cohen said. After more than $70 billion in raised equity and counting, it's still rolling.
"We all had a near death experience, but I think it demonstrated and stress tested the REIT model, and that's why the prices have rebounded. The companies are in great shape and the years to come look very good for the industry."
The crash of debt and the commercial mortgage-backed securities markets has also contributed to the growth of REITs and the public markets, said Michael Fascitelli, CEO of Vornado Realty Trust (NYSE:
VNO). But "there was nothing wrong with CMBS -- it was just abused," Fascitelli said.
"All of the tranches of debt made the deal structures more complicated. It wasn't meant to be an IQ test," he said.
Debt markets will come back, and simplicity, transparency and lower levels of debt and higher amounts of equity will reign in the public space, Fascitelli predicted.
"We should have a two or three-year run. The wind is at our backs for the public REITs to gain share because it's going to be a deleveraging situation, and REITs will have the lowest cost of equity," Fascitelli said.
