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BETTER WITH AGE
Happy 50th Birthday, REITs. We didn't buy anything, but it appears you're doing that yourself. REITs stand as a sign of resiliency in a recovering market, noted NAREIT CEO Steven Wechsler yesterday at REITWorld 2010 (see Day One coverage). And the model will deliver the same shareholder value for the next 50 years, he says.
Bank of America Merrill Lynch global head of real estate Ron Sturzenegger, Evercore Partners managing director Martin Cicco, Kimco Realty Corp. executive chairman Milton Cooper, Colony Financial CEO Richard Saltzman, and Simon Property Group CEO David Simon
NAREIT made up for the lack of birthday cake with a panel of REIT luminaries: Bank of America Merrill Lynch global head of real estate Ron Sturzenegger, Evercore Partners managing director Martin Cicco, Kimco Realty Corp. exec chairman Milton Cooper, Colony Financial CEO Richard Saltzman, and Simon Property Group CEO David Simon. The group reminisced about what they've learned—for Milton and David, much of it was in comparison to the early ‘90s, when both firms went public. (Milton painfully reminded us that a stamp cost 25¢, gas was $1.25/gallon, and the federal debt was only $3.6 trillion.) What happened to real estate this time around “was a walk on the beach” compared to then, David says. There's a lot more capital now, and if you have an overleveraged portfolio, you can find help.
REITWorld 2010 at the Waldorf Astoria
The crisis is gone, notes Milton—you try to buy real estate, and you're up against 30 bidders. Whether interest rates and cap rates go up, there will still be enormous demand for assets. The industry has benefited from quantitative easing, but we haven't seen the expected deals, Richard notes. The next couple years will be easier in the public markets, and there's a queuing up for IPO activity. REITs need more investors—“we're tapped out,” David says—and need to broaden the equity base. There's been a clearer picture of the “haves” and “have-nots” over the past two years, and REIT management teams need to think about the appropriate size of their companies for their sectors, Martin suggests. The luncheon also included a shout-out to two other REIT quinquagenarians:Pennsylvania Real Estate Investment Trust and Washington Real Estate Investment Trust, which also mark their 50th this year.
Brookfield Office Properties CEO Ric Clark and CFO Bryan Davis
Brookfield Office Properties has held up in the recession, with overall occupancy at 95.1%, report CEO Ric Clark and CFO Bryan Davis. They credit this to being in “dynamic markets” that bounce back quicker from cycles because of their focus on financial services, energy, and government-heavy cities—and NYC, DC, and Houston are performing the best. Overall, the firm has 60M SF in its development pipeline, and half a dozen assets for sale in the US and Canada. It recently signed contracts to acquire assets in DC and Houston (mum's the word, pesky confidentiality agreements). It's also fresh off of a $800M refi of NYC's 245 Park Ave., completed through the Bank of China. Ric says if you're a good sponsor with a good reputation in a good market, there's plenty of capital for you. One market on Brookfield's radar: San Francisco, but there hasn't been an opportunity to enter that market yet, they say.
AvalonBay Communities IR senior director John Christie, CFO Tom Sargeant, and CEO Bryce Blair
AvalonBay Communities has directly benefited from improving apartment fundamentals—we heard from IR senior director John Christie, CFO Tom Sargeant, and CEO Bryce Blair that revenue was negative throughout '09, but that's changed. Job growth is now trending modestly yet positively, and younger adults, who are taking those jobs have the propensity to rent. Supply continues to tail off, a trend that will only accelerate in '11 and '12. It's a tale of two coasts—the East is stronger than the West, with Massachusetts and Connecticut its strongest markets, followed by NY and DC. Recovery is still lagging on the other side of the US (we can't tell if that's because of, or in spite of, medical marijuana), but they note an overall stable occupancy rate of 95.8%. In Q3, the firm closed on three communities worth $250M and have $600M more buying capacity. It also has 12 communities worth $1B under construction and will start another $300M worth by year's end.
Equity Residentials' David Neithercut, with Fred Tuomi and Mark Parell
Equity Residential increased occupancy 4.5% to 5% year-over-year while increasing rental rates and occupancy (100 bps), says David Neithercut, with Fred Tuomi, and Mark Parell. Even asking rates are up 8% over the same period. With 900k new households this year, the REIT's capture rate is high. Fred says EQR's Boston, NY, and DC portfolios are 96% occupied. NY rents are up 11% and premium pricing for penthouses is coming back. Like AvalonBay, they're also seeing slower recovery on the West Coast.
Alexandria Real Estate Equities VP of capital markets Krupal Ravel
Over the past 13 years, the average occupancy for Alexandria Real Estate Equities' portfolio was 95%. Post downturn? Only 94%, notes VP of capital markets Krupal Raval. The nature of research is that it has a very long life and you need talent in the right areas. For Alexandria, it's bi-coastal cities like San Francisco, San Diego,New York, and Cambridge, Mass., with the latter the most dynamic of its markets. Despite the strength of life sciences, the REIT's mentality has shifted post-market crash, he notes—notably, it has decided not to develop speculatively. The first tower of NYC's East River Science Park will be 95% leased by the end of the year, but it will not proceed with the next tower without significant pre-lease activity. Alexandria wants to be as prudent as possible, he says, even in a market with single-digit vacancy like Cambridge.