REITs Are In Sell Mode In D.C., With Billions Of Dollars In Property On The Market
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Record sale prices and concerns over the economic cycle have turned many public REITs with large D.C.-area holdings into sellers this year.
D.C.-area REITs including JBG Smith, AvalonBay Communities, Washington REIT, Host Hotels and others have all closed major property sales this year or reportedly have large portfolios on the market, a sign that the publicly traded real estate firms are engaging in similar strategies of selling off assets.
“People are cognizant of where we’re at in the cycle. It’s the later stages, and the transaction market is active and there are different buyers out there today," said Robert W. Baird Senior Research Analyst Michael Bellisario, who covers lodging REITs. "So if you want to sell assets you don’t want to own for the next five years, now is a good time to sell. That’s what we’re seeing not just in the hotel market, but broadly across real estate."
JBG Smith has been one of the most active sellers among the D.C.-area REITs. The Montgomery County-based REIT unveiled a strategy in March to unload assets in what it sees as a seller's market. It has since raised over $549M through a string of sales and recapitalizations, most recently the $65M sale of the Lion Building in Northwest D.C.
"We plan to continue to capitalize on the current environment to raise attractively priced capital," JBG Smith CEO Matt Kelly said in a release Thursday announcing the deal.
AvalonBay Communities sold an Arlington, Virginia, apartment building for $169M in August, part of a nationwide strategy it has pursued this year. The REIT has sold eight communities totaling $620M in 2018 and raised another $610M by selling an 80% stake in a five-property New York City portfolio. It has also acquired four communities for $335M, but that was dwarfed by its selling activity.
"We have been opportunistically funding acquisition and development activity through the transaction market," AvalonBay Chief Investment Officer Matt Birenbaum said on an earnings call Tuesday. "This year we are net sellers of $895M, providing capital to fund investment activity."
The strategy of REITs turning to property sales to raise capital comes as a result of the struggling stock prices the REIT market has experienced recently, said Georgetown University professor Jonathan Morris, a former Boston Properties executive who now teaches a course on REITs.
Because their stock prices are down, REITs can't raise equity because it would dilute their existing shareholders, Morris said, so they must turn to asset sales.
"What you’re seeing in the Washington market is a bifurcation, where you’ve got private sector guys who are pretty active in the development space; they’re busy building and buying stuff," Morris said. "The REITs on the other hand, not all of them, but many, are selling things and they call it capital recycling."
The strategy of selling assets has also made sense because of elevated pricing levels in the D.C. market, which Morris said is driven by an influx of foreign capital.
"Foreign investors have typically led the way in pricing," Morris said. "If you look at the last five to 10 sales of office buildings in D.C., you'll see prices between $1K/SF and $1,200/SF, and you're going to see a foreign entity buying it or a U.S. entity buying it for a foreign client."
Washington REIT this summer sold an office building in D.C.'s West End for $102M, and in January it closed on the sale of an Alexandria office complex for $93M. It bought an Arlington office tower for $250M, making it a net buyer on the office side, but reports indicate it could be selling out of another property type. Bloomberg reported in September WashREIT is looking to sell its entire retail portfolio, which could go for roughly $800M. WashREIT CEO Paul McDermott declined to comment on the report in an earnings call last week.
Green Street Advisors Director of REIT Research Cedrik Lachance, who said he has no inside knowledge beyond the public reports, said selling its retail portfolio would be a logical course of action for WashREIT.
"It would certainly make strategic sense for them to exit the retail business," Lachance said. "The public market tends to prefer more focused companies rather than those diversified across property types."
Another REIT looking to focus its holdings on a specific property type is Liberty Property Trust. The REIT's CEO told analysts last week it would sell its entire office portfolio, including four Downtown D.C. properties, to make its portfolio entirely industrial assets.
Bethesda-based Host Hotels in September sold two New York City hotels for $613M. The REIT is also marketing a 12-property portfolio that includes two hotels in the D.C. region, Bellisario said. Part of Host's strategy is focused on reducing its New York City holdings because of conditions in that market, Bellisario said, but it is also looking to shed assets nationwide.
“More broadly they are selling other assets or they’re attempting to sell other assets, that is more of a portfolio cleanup," Bellisario said. "They’re selling lower quality, lower growth, higher [capital expenditure] properties that they don’t want to own five or 10 years from now.”
Other Bethesda-based lodging REITs are selling assets as a result of recent mergers. RLJ Lodging Trust has sold $600M of assets over the last 12 months, it said in a September press release. Bellisario said those are largely assets that it acquired from last year's $7B merger with FelCor Lodging Trust that it does not consider core to its strategy.
Pebblebrook Hotel Trust and LaSalle Hotel Properties, two Bethesda-based lodging REITs, are working to close their $5.2B merger before year-end. The merged company plans to sell three hotels in New York and San Francisco, and its CEO said it plans to sell an additional $500M to $1B in assets, though he did not say in which markets.