Five Courageous REITs, Plus Ivanka Trump
More real estate pros have invaded NYC this week than models during Fashion Week. No doubt New Yorkers noticed all the pretty people hanging around the Waldorf Astoria for NAREIT’s REITWeek and the Marriott Marquis for the NYU International Hospitality Investment Conference yesterday. We’ll start with the prettiest of them all…
1) Vornado’s Reinvention
Vornado has proved the doubting Thomases wrong, says CEO Steven Roth, now that the REIT has finished two years of simplifying its book of business. Unable to sell its Merchandise Mart portfolio in one transaction, it did so in eight or nine but held the 3.5M SF Chicago showpiece and converted it to creative office. (This also works in school cafeterias. Nobody wants the whole bag, but you can unload your apple, sandwich, and Dunkaroos individually.) That has upped the property's income stream and long-term value, aided by the over 600k SF lease by Google’s Motorola division. And just a few weeks ago, PayPal took 60k. The REIT also exited Steven’s bread and butter—malls—deciding it didn’t have the scale to compete with Simon and GGP, and spun off 80 strip retail centers.
All this while creating value within its portfolio. It took over 222 Central Park S, odd because the REIT isn’t a condo developer but sensical because it’s across the street from its HQ. And Vornado is remodeling 1.1M SF of office space on 34th Street and bought Virgin’s retail operations so it could get the store out of 1540 Broadway on Times Square’s bowtie. It also cut a deal to lease Marriott Marquis’ retail across the street and is building what Steven calls the world’s biggest sign, which we also snapped yesterday. The biggest growth factor in Vornado’s portfolio, though, he says, is the rental rate growth spreading across Midtown South.
2) Empire State Realty Trust’s Retail Reclamation
Retail forms 7% of Empire State Realty Trust’s portfolio, though that will grow, says CEO Tony Malkin (whom we snapped, flanked by colleagues Tom Durels and David Karp), as the owner converts second floor and lower-level spaces as leases roll. Jumpstarting that is the company’s 112 W 34th St, where three floors are ripe for conversion to retail across the street from Macy’s. Tony also says the REIT’s Stamford holdings have long outperformed the market, but it’s not looking to expand there. In fact, ESRT, he’s careful to say, is emotionally connected to nothing except the bottom line and distributions, so anything could be up for sale.
3) W. P. Carey’s Non-Traded Pride
W. P. Carey’s unique-to-REITs model of owning an investment manager has its advantages, says CEO Trevor Bond (give the new guy some leeway; the company has been a REIT for just two years). The company derives 10% of its revenue from that arm, and Trevor says it’s a good way to grow revenue without issuing equity that dilutes value. While the equity-raising climate is robust now, the net lease investor used this method to raise $500M during the downturn, when raising equity was harder but acquisition opps looked good. He says the funds help buffer against cash-flow bumps and smooth out earnings. This year, it’s raised $800M, and the REIT also uses its own balance sheet for acquisitions, especially for deals in which the cost of capital would be too high for a fund.
4) Boston Properties’ Lack of Respect for New York (we kid)
NY is third of four in Boston Properties CEO Owen Thomas’ ranking of his firm’s markets. San Francisco has it all, he says: net absorption, gross absorption, deliveries, and rent growth. Boston’s Cambridge has virtually no vacancy, and rental growth is spilling over to nearby Waltham, where the REIT is considering more development. NYC has pockets of strength, says Owen, but its tech market simply isn’t where San Fran and Boston’s are. DC is the weakest, considering relatively weak government and legal industries.
Funding also differs in each market, says president Doug Linde. Market conditions alone have driven cranes to San Fran. In Boston, investors’ return expectations have lowered, pushing rents for new properties closer to rates for existing buildings. In those conditions, tenants are opting for the new builds (even tech firms are pre-leasing). In NYC, the WTC has risen with incentives, and Hudson Yards may also see a carrot on a stick. In the DC area, the REIT is talking to a buyer for its Avenue apartments and has Reston, Va.'s Patriots Park (100% leased to the GSA) on the market.
5) Prologis’ Contradiction of Your Econ Teacher
There’s more to the decision to build than just supply and demand; don’t forget rental rates. US industrial deliveries have grown from 20M SF in 2011 to 65M SF in 2013 and still fell dramatically short of last year’s demand for 225M, says CEO Hamid Moghadam. Next year, he expects, 110M SF of new inventory will be built, but that’ll be half the anticipated demand of 200M SF. Rents in the Inland Empire, Dallas, and Houston are high enough to justify the construction that’s happening there, Hamid says, but rents haven’t bounced back enough elsewhere to justify construction, despite that demand. Prologis aims for $2.5B worth of development per year but is on pace for $2B now, owing to a slower than anticipated recovery in Europe and more sluggish than expected market in Mexico.