Real Estate Investment Trusts

REIT Returns Modestly Higher in July

REIT returns were modestly higher in July, although certain property segments continue to post outsized gains.

The total returns of the FTSE NAREIT All REITs Index rose 1.2 percent in July, while the S&P 500 posted a total return of 2.1 percent. For the first seven months of 2017, total returns of the FTSE NAREIT All REITs Index gained 6.7 percent, while the S&P 500 returned 11.6 percent.

Total returns of the FTSE/NAREIT All Equity REITs Index gained 1.3 percent in July and 6.2 percent through the first seven months of the year. The total return of the FTSE NAREIT Mortgage REIT Index rose 0.4 percent in July and 16.5 percent for the year to July 31.

The yield on the 10-year Treasury note was flat in July. Through July 31, it dropped 0.1 percent for the year.

“Overall, we’re seeing a decent amount of growth, but there’s been no break-out growth from the REIT sector,” said David Rodgers, senior analyst at Robert W. Baird & Co. He pointed out that the more moderate pace of growth “makes sense” following REITs’ outperformance of the last several years.

Meanwhile, Brad Case, NAREIT senior vice president for research and industry information, pointed out that the stock market rally seen this year has been concentrated in stocks that are already expensive relative to their earnings, particularly large-cap growth stocks.

While some REITs are large-cap stocks, “they’re not large relative to the behemoths that dominate that part of the market,” Case explained. He noted that a more accurate assessment of REITs can be made by comparing their performance to that of small-cap value stocks, which historically are most similar to REITs.

Small-cap value stocks, as measured by the Russell 2000 Value Index, gained 0.6 percent during July and 1.2 percent year-to-date, Case noted.

“Investors hold REITs because they want the asset class diversification benefits of real estate, and this year has been a good example of that because REITs have so strongly outperformed the non-REIT stocks that are otherwise most similar to them,” Case said.

Meanwhile, Rodgers stressed that as the real estate cycle becomes more advanced, investors are becoming increasingly selective as to which REIT segments they own. That has led to healthy gains in several REIT property types.

Industrial REITs posted returns of 3.5 percent in July and 15.1 percent for the year to July 31. According to Rodgers, second quarter industrial earnings calls have generally been more bullish compared to the previous quarter.

Returns for data center REITs totaled 4.1 percent in July and 26.6 percent through July 31. Manufactured home REITs recorded returns of 1.2 percent in July and 20.1 percent for the first seven months of the year. Infrastructure REITs also had a solid performance, with return of 2.1 percent and 24.8 percent year-to-date.

Shopping center REIT returns of 7.7 percent led the pack in July, although returns are 11.7 percent lower year-to-date.

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Published at Tue, 01 Aug 2017 19:58:44 +0000

Former Host Hotels CEO Says Financial Crisis Posed Greatest Challenge of His Career

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Ed Walter, the former CEO of Host Hotels & Resorts, Inc. (NYSE: HST) and the 2013 NAREIT Chair, offered his thoughts on some of the transformative events in the REIT market and hotel business during his career.

In terms of changes to the lodging sector, Walter pointed out that views on the experiences of guests “evolved in a very significant way.” In the 1990s and early 2000s, hotel REITs focused on improvements to guest rooms, including upgrading bedding and installing flat-panel televisions. Now, companies are focusing on “creating more of an experience throughout the hotel, especially in the lobby,” according to Walter.

“That notion of making the lobby and the other facilities and amenities that are part of that a more important part of the hotel experience helps make the hotel more memorable and the travel more fun,” Walter said.

In making the transition to the role of chief executive, Walter said he was surprised by the amount of time he dedicated to working with the broader REIT industry. These efforts included interacting with policymakers regarding issues such as supporting the terrorism insurance market and labor regulations. Walter also noted that his time in leadership roles at NAREIT showed that chief executives in REITs and publicly traded real estate companies are committed to working together for the betterment of the industry.

Regarding the biggest challenges he faced as CEO of Host Hotels, Walter reflected on the global financial crisis that began around the time he started the job. “Nobody really anticipated that liquidity would dry up as rapidly and as comprehensively as it did,” he said. At the same time, Corporate America came under fire for spending on travel and company events, which hurt business at Host properties.

“We couldn’t even predict what the year was going to look like,” he recalled. “For about a 15-month period, every forecast that we got from our properties was worse than the last one.”

Walter also pointed to the financial crisis as Host’s greatest success during his tenure.

“We looked for opportunities where we could take advantage of the dislocation in an intelligent way,” he said. “Collectively, the different steps that we took… put Host in the position to not only ride out the downturn—even in the volatile business we were in—but to really position ourselves to outperform.”

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Published at Mon, 31 Jul 2017 17:54:21 +0000

S&P’s Michael Wilkins on the Transparency of Green Investment

Driven in large part by the Paris climate agreement, the capital markets have taken a keen interest in the trillions of dollars in financing need to meet the global community’s environmental objectives.

That has also created a need for more rigorous assessments of the environmental quality of investments, according to Michael Wilkins, head of environmental and climate risk research for S&P Global Ratings. Earlier this year, S&P unveiled its Green Evaluation service intended to boost transparency and help investors identify worthwhile environmental projects. REIT magazine spoke with Wilkins about the growing demand for green projects and how they’re being financed, as well as how S&P’s new service aims to help assess the environmental quality of these projects.

REIT: Can you explain what the objectives of the Green Evaluations are?

Michael Wilkins: The main objective is to try and give a relative ranking of environmental impact of green financing, whether or not it’s a bond or a loan or any other type of capital markets instrument. The idea is essentially that investors are now asking what the green quality of their investment is, as well as asking what their credit quality is. While our traditional credit ratings can address the issue of credit, they don’t address the issue of environmental impact.

We’ve developed this new product, called the Green Evaluation, that provides specifically that kind of information: Not only what the environmental impact is, but also how the financing is being managed from the point of view of the transparency in governments and of the use of proceeds, which are extremely important aspects of being a part of the finance market.

The investors want to know that their money is going to environmentally beneficial causes and not being diverted elsewhere. They don’t want to be greenwashed at all, so that’s why that aspect is also equally important to what the environmental impact is.

That’s why we are doing this, to provide that extra little bit of transparency and granularity to address the community about environmental impact to allow them to benchmark their financing instruments, based on those criteria.

REIT: I see more and more discussion about resilience in green investment. Can you tell us what that really means?

Wilkins: Resilience is really how strong and how durable a particular infrastructure asset may be in respect to its ability to withstand the damages caused by extreme weather events brought about by climate change. For example, if we see financing being directed to reinforce an infrastructure asset, such as a bridge or a water treatment plant, against the impact of severe weather—floods, storms, high winds, whatever it may be—what kind of damage could be caused to that infrastructure?

That actual damage can be modeled and is modeled very regularly by insurance companies as part of catastrophic loss policies. That type of modeling can be used, as our insurance colleagues know, for testing the resilience level or the resilience benefit that the finance can bring about.

REIT: Does resilience come up a lot in your discussions with investors?

“Investors are now asking what the green quality of their investment is, as well as asking what their credit quality is.” – Michael Wilkins

Wilkins: It is coming up more and more. Most of the financing in the green bond market, which is probably the most developed out of all the green financial markets, has been directed to what are known as mitigation projects. These are projects aimed at cutting carbon emissions mainly and also improving water usage. Those types of projects are known as mitigation because they mitigate the impact of human activity on the environment. They account for about 90 percent of all financings, and we’re seeing the rest being directed towards adaptation, especially in developing markets, where the impact of catastrophic weather events is more acute than for the impact they have on infrastructure.

We are also seeing more and more in the U.S., especially along the East Coast, where recent damages caused by Superstorm Sandy caused a lot of strengthening of transmission lines, water treatment plants and other infrastructure assets. That type of investment has been financed to a large degree by municipalities by the issuance of municipal bonds. Those types of bond issuances are directed towards adaptation. We are expecting a lot of demand to be coming from that space.

REIT: It seems as though digging in to look at projects on the asset level, which the Green Evaluation aims to do, is somewhat difficult. How precise can these ratings really be?

Wilkins: Well, it is a question of providing a relative ranking. We’re not taking into account absolute measures on carbon reduction, for example.

What we’re trying to do is say, if you have a financing of a $100 million in a particular project, which has 8 percent of the proceeds directed to wind power in the U.S. and 20 percent for solar in Mexico, from a perspective of environmental benefits, how is that investment going to compare to, say, financing another $100 million into clean coal conversion plants in China?

As an investor, you can decide how you want to put your green allocation in your portfolio to work to achieve the best possible environmental outcome. That’s the intention behind the Green Evaluation. It provides a relative ranking, rather than to provide an environmental audit of a firm’s investment into specific technology.  It has more to do with what this technology is going to contribute to the environment.

REIT: Are there any plans to build out to broader looks at portfolios of assets?

Wilkins: Absolutely. We see quite a lot of green financing being done on a portfolio basis, especially given that a lot of these projects are quite small on an individual basis, like energy-efficiency projects. Even renewables, in terms of capital employed, are very small, so that requires them to be brought together as portfolios and bundled into higher structured transactions.

We see a lot in the world of project financing, for example. That’s quite an obvious use of this type of tool. We’re also seeing that from the perspective of financial institutions. For example, a bank will raise a green bond, and then it will allocate the proceeds of that green bond to a number of existing projects which it may have exposure to on its own book. That’s another type of portfolio approach.

We can actually take into account that type of disaggregation of proceeds by looking at each individual asset type on a separate basis and looking at each individual asset type’s contribution from an environmental perspective and then bringing it up together on our way to the aggregate basis again in the final score.

REIT: What are some of the greatest differences in reporting from region to region around the world?

Wilkins: If you are issuing a labeled green bond, then you are more likely than not to adhere to green bond principles, which were established a couple of years ago by the International Capital Markets Association. Those principles, which were developed by a group of about 12 underwriting banks, provide a discipline to the market in terms of requiring a certain level of reporting and disclosure as to the allocation of the proceeds from the bond issue—not just the allocation, but also the way that the financing is allocated and how you are seeing a commitment to reporting, a level of disclosure, the methodology for the calculation of the environmental impact and so on.

There’s quite a lot of detail suggested as best practice that is followed under the green bond principles. The same goes for governance surrounding the use of proceeds and how those funds are managed and how they are verified and tracked. That is also included.

To try and do that, it does require a certain level of additional cost and effort. Some financing entities may be put off from doing it, but if that’s the case, then the investors may be put off from buying their instruments—because they are looking for that level of extra transparency and governance as a form of protection against greenwashing.

While we see a lot of the labeled green bonds stick to the green bond principles, outside of the labeled green bond sector, there is less emphasis on this type of reporting, regardless of which region we are talking about.

If you don’t have that strict adherence to these types of principles, the danger is their funds could be misallocated, or it may not be clear as to what the benefit of the investment actually is. That’s the important thing to bear in mind.

“As an investor, you can decide how you want to put your green allocation in your portfolio to work to achieve the best possible environmental outcome.” – Michael Wilkins

Now, that’s not to say that there are some financings out there which may not be labeled green, but may still have a green component to them. We can still assess those through the Green Evaluation tool. The chances are that the transparency and governance score will be lower, which will bring the overall score down, but the environmental impact is more important. It is more highly weighted in the overall score.

REIT: In terms of the green assets that you could evaluate, do we have any idea about what the size of the market is here?

Wilkins: If we look at solely the labeled green bond market, issuance in 2016 was around $100 billion. This year, estimates are ranging up to $200 billion—so, basically, doubling in size.

Probably more important than that is the bigger pool of investment in environmental projects which may not be labeled green. In the world of infrastructure and real state, that is huge. The infrastructure market is somewhere in the region of nearly $3-4 trillion per annum in terms of funding that is raised in the capital markets. In terms of the overlap between green finance and infrastructure, it’s around 75 percent.

So 75 percent of all infrastructure investment needs to have some sort of green or sustainable component to it. That gives you a size of scale of the potential market.

Of course, not all of that will be 100 percent green: Some of it will be partially green, some of it won’t be green at all, some of it will be fossil fuel. But as we move and transition towards a low-carbon environment, it will begin to increase more and more. There will be more interest from investors to make sure that their allocations to those types of investments are increased.

Countries such as France require institutional investors to disclose how their assets under management are contributing to that transition to low-carbon. That is driving demand, so I think we are kind of seeing a convergence of investor demand and issuer requirements for green investments.

Michael Wilkins is a managing director with S&P Global Ratings based out of London. He serves as head of environmental and climate risk research for S&P. Wilkins specializes in corporate and project finance credit analysis, carbon markets, and other aspects of climate and environmental finance.

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Published at Fri, 28 Jul 2017 12:54:04 +0000

Sustainability: Together and Now

Let’s all be honest with one another, who hasn’t noticed any changes to our natural surroundings, such as weather patterns, seasonal shifts, wild life, pollution or other factors? It is increasingly apparent that rapid population growth and industrialization are producing alterations to our planet’s ecosystems, and it is likely that these trends will continue, if not intensify.

Two key touchstones of this pernicious problem are that we all own it together and something needs to be done now, as opposed to later. As commercial real estate owners, we have an important role to play in contributing solutions to these environmental challenges. Buildings account for over one-third of total final energy use and 19 percent of global greenhouse gas emissions.

So we at Boston Properties(NYSE: BXP) are very focused on sustainability because of its positive environmental impacts and because we believe it makes business sense. Our company was founded in 1970 and builds, owns and manages high-quality office and residential assets in leading U.S. cities. Our success in this highly competitive business has depended on, among many other things, attracting creditworthy tenants (who often have their own sustainability goals and awareness), developing and managing best-in-class work environments (integrating green building features), exploiting advances in technology to maximize profitability in all aspects of our operations (including energy and water conservation), maintaining strong relationships with the communities we serve (who have their own sustainability emphasis and strategies), and attracting and retaining great employees (many of whom care deeply about our natural environment).

As sustainability has become more important to our tenants, shareholders, employees and community stakeholders, we have been in the fortunate position of having a good story to tell and are continuously focused on improving our performance. The foundation of our sustainability efforts has been environmental impact mitigation, where we have stated public goals. In our 2016 Sustainability Report, we announced the early achievement of our 2020 reduction targets for energy, water and greenhouse gas emissions. During the 2016 calendar year alone, we reduced like-for-like energy and water use 6.9 percent and 4.0 percent, respectively, saving approximately $10.7 million in annual recurring operating costs.

We increasingly use third-party validation tools to measure our performance, improve our transparency and reinforce the credibility of our sustainability accomplishments. We have steadily grown our LEED® Certified green building portfolio to over 17 million square feet and have certified 62 properties representing 68 percent of our eligible floor area under the ENERGY STAR® Commercial Buildings Program. Over the last five years, we have participated in the Global Real Estate Sustainability Benchmark (GRESB®) assessment and in 2016, we earned our fifth consecutive Green Star, ranking among the top 5 percent of 733 global participants.

Looking ahead, there is much more to do, and we will continue to implement policies, programs and projects that complement sustainable development and operations. Our experience demonstrates that through our activities as real estate owners, developers and managers, we can contribute to environmental solutions as a positive force while improving our financial performance and becoming a stronger, more purposeful organization in the process.

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Published at Thu, 27 Jul 2017 18:17:54 +0000

Retail REITs in Adaptation Mode

Negative news about store closings have cast a shadow over the business of retail REITs. But regional mall and shopping center REITs face the challenge with an air of resilience and, for some, even optimism.

“The news isn’t all bad for retail REITs, even though there’s headline noise around the retailers themselves about store closures and competition from e-commerce,” says Ross Smotrich, managing director and senior research analyst with Barclays Capital. “News of all the store closures leads investors to assume retail is dead, but that’s not accurate.”

Some measures of operating performance did slow in the first quarter of 2017 compared to 96.1 percent in the fourth quarter of 2016. Occupancy rates for retail REITs averaged 95.3 percent in the first quarter of 2017, according to Calvin Schnure, senior vice president of research and economic analysis at NAREIT. Schnure noted that occupancy in the sector typically declines in the first quarter due to normal seasonal variations. Sector funds from operations averages dipped approximately 5 percent in the first quarter of the year compared with the same period in 2016. Meanwhile, investors earned $2.3 billion in dividends from retail REITs in the first three months of 2017, down 10 percent from the year-earlier period.

However, Schnure points out that fundamentals in the retail REIT sector were strong in 2016. Overall, he says the sector remains on solid ground from a fundamentals standpoint.

“The data show staying power and stability among retail REITs, which tend to own high-quality properties in the more desirable areas” Schnure says.

Historical Shifts in Retail

Milton Cooper, co-founder of Kimco Realty Corp.(NYSE: KIM), is well-known for saying “the only constant in retail is change.” Current Kimco CEO Conor Flynn understands what that challenge means now. He also sees opportunity for Kimco.

Sector Stats

Sector: Retail
Constituents: 30
One-year Return: -18.39%
Three-Year Return: -0.08%
Five-Year Return: 5.34%
Dividend Yield: 4.92%
Market Cap ($M): 57,481
Avg. Daily Volume (Shares): 3,062.7
(Data as of June 15, 2017)

“The big issue is perception versus reality,” says Flynn. “This isn’t the death of all retail real estate. In fact, our occupancy rate for spaces with more than 10,000 square feet is 97.3 percent. In addition, 65 percent of our leases are at below-market rents, so vacancies that do occur offer us an opportunity to raise the rent to market rate and to redevelop the space.”

Alexander Goldfarb, managing director and senior REIT analyst at Sandler O’Neill + Partners, says people forget that retail has always been under attack in some way, pointing to the hype about the appearance of big box stores as “category killers” and the shrinking number of department store brands over the past decade.

However, Goldfarb acknowledges that this cycle is different because of several factors.

“During the financial crisis, consumers realized you can do with less, so their buying habits have changed,” says Goldfarb. “People’s preferences have changed, too, so now they spend a lot more on their smart phones than they used to and more on eating in restaurants.”

Laurel Durkay, vice president and associate portfolio manager for the real estate securities team at Cohen & Steers, says there’s a distinct “share of wallet” shift among consumers.

“People spend more on experiences like travel and home furnishings and less on clothing,” she says. “REITs actively manage their response to this with experiential retail, adding elaborate playgrounds and restaurants to their tenant mix.”

Competition and Collaboration With e-Commerce

The evolution of consumer habits doesn’t mean that brick-and-mortar stores will disappear, says Goldfarb. Retailers, including previously purely e-commerce companies, understand the need to get closer to consumers and to deal with returns more efficiently.

“Retailers have discovered the ‘tethering’ effect: When they close a store, local online sales fall, and when they open a store, local online sales increase,” Flynn points out.

Consumers still want to touch and feel the goods they’re buying, which is why the omni-channel strategy is ultimately the solution to long-term viability, says Chris Weilminster, president of the mixed-use division of Federal Realty Investment Trust(NYSE: FRT).

“We take advantage of being part of the ‘last mile’ location close to a customer’s home or work,” Flynn says. “Our retailers realize that we live in an on-demand world and that linking online ordering to in-store pick-ups and returns drives traffic.”

Even grocery stores are adapting by offering click-and-pick-up services and emphasizing different products now that so many people order nonperishable items from sites like Amazon and Jet, Smotrich says. It remains to be seen how Amazon’s June announcement of a planned $13.7 billion acquisition of Whole Foods will impact the grocery shopping market.

Bifurcation Within Retail Sector

All retail centers are not equally impacted by the latest changes in the retail business.

“The retail sector has always experienced disruption, but now we’re experiencing a permanent disruption in the way consumers shop,” Weilminster says. “But the end result is a flight to quality.”

Smotrich says he sees bifurcation among malls and shopping centers, with A-quality property thriving. “REITs that already own high-end assets, who have a quality balance sheet and a quality operating system, will continue to thrive,” he says.

Overall, the retail real estate market is currently facing an oversupply of retail space in the U.S, according to Durkay. She notes that whereas the U.S. has 24 square feet of retail space per person, the U.K. has five.

Schnure agrees oversupply is definitely an issue, but location matters.

“There’s no oversupply in areas with a high-income, growing population, and most of the older malls in areas with a slower economy aren’t owned by REITs,” says Schnure.

Retail REIT Strength

Some retail REITs are cleaning up their portfolios by selling lower-quality assets and redeveloping properties, Smotrich says.

Kimco sold $5 billion of real estate in the past five years, primarily in secondary and tertiary markets. That has helped the longstanding retail REIT focus on the top 20 major markets in the U.S., Flynn says. Kimco has moved out of markets that have abundant shopping centers and into locales with population and wage growth and increasing household formations, among other things.

Additionally, retail REITs are positioning their shopping centers and malls as community gathering places, not just shopping destinations.

“We create larger public spaces to bring people together for concerts and things like ‘mommy-and-me’ events,” says Weilminster. “For a retail center to be successful, it’s important to have something that’s a daily draw like a grocery store or a health club and then add in entertainment and restaurants. You can’t have a single-purpose retail center anymore.”

Mixed-use developments also offer a solution. “We look for the best possible mix of retailers and entertainment amenities that offer a European living environment and access to mass transit,” Weilminster says. At Assembly Row in Somerville, Massachusetss, for example, Federal Realty changed the dynamic of the city and the fabric of the community by getting a local train stop built.

Other steps taken by retail REITs include limiting their exposure to any one tenant.

“For a retail center to be successful, it’s important to have something that’s a daily draw like a grocery store or a health club and then add in entertainment and restaurants.”
– Chris Weilminster, Federal Realty Investment Trust

“Kimco has 8,700 leases and 4,100 tenants, so we have tremendous diversity in our tenants,” says Flynn. “Our top tenant is TJ Maxx, but even that tenant rents just 4.2 percent of our leasable space. Seven of our top 10 largest tenants hit all-time high sales last year, so many of them are even expanding.”

Some categories of retail that are doing particularly well, according to Flynn, include off-price stores, home improvement stores, specialty grocery stores, craft stores, fitness centers and beauty supply stores. Seritage Growth Properties(NYSEMKT: SRG) is experiencing success renting to those types of tenants, as well, according to Benjamin Schall, the company’s president and CEO. Seritage, which spun off from Sears Holding Corp. in 2015, is projecting that less than 50 percent of its income will come from Sears by the end of 2017, down from 80 percent around the time Seritage went public. As of June, the company had leased 3 million square feet of space in the preceding 18 months while converting single-tenant buildings to multi-tenant shopping centers. Rents on those spaces jumped to $18 per foot, roughly four-and-a-half times what Seritage was generating when the space was rented to Sears.

“We expect 50 percent of income to come from newly developed shopping centers occupied by best-in-class retailers that we believe will continue to resonate with consumers in an omni-channel world,” Schall says.

Opportunities for REITs and Investors

Although some disruption will likely continue in the near term for retail real estate companies, according to Durkay, the highest-quality property managers and owners will continue to find opportunities for growth in the long term.

“That’s why quality is of utmost importance,” Durkay says.

Flynn says Kimco is achieving internal growth through redevelopment. It is currently spending $1 billion on construction to expand space for restaurants and grocery stores. The company is also adding apartments and hotels to transit-oriented sites.

“Now that people are using ridesharing options and public transit and eventually will rely on driverless cars, we’re looking to unlock the value in our parking lots to convert them to a net asset value,” says Kimco’s CEO. “In order to drive retail growth and sales tax revenue, jurisdictions may need to approve rezoning so we can develop apartments, offices and hotels on those lots.”

Meanwhile, as retail REITs evaluate the health of their portfolios, they’re also reaching out to investors to help them understand the upside of investing in retail.

“We explain to investors that our below-market leases offer an opportunity to unlock future value, our balance sheet is stronger than ever, and we have tremendous liquidity to repurpose and adapt to future changes in retail,” says Flynn.

Goldfarb says that even though some investors might be shaken, he thinks most have confidence that the retail REITs can survive and thrive.

“People need to realize that physical retail is not going away,” he says. “The REITs that have the financial capital to get through this cycle will do fine.”

Environmental Impact of Online and In-Person Shopping

A 2016 study by Simon Property Group(NYSE: SPG) and Deloitte Consulting compared the environmental impact of shopping for a product online with shopping at a brick-and-mortar store. They found something surprising: Online shopping has a 7 percent greater environmental impact than shopping at a physical store.

Researchers took into account the material, energy and fuel used to provide a product to an online customer and an in-person customer. It was determined that per-product impact was higher for online orders because of increased packaging and the high transportation costs of delivering one or a few products to consumers’ homes.

(Why?)

Published at Thu, 27 Jul 2017 13:25:02 +0000

ESG Reporting Shows Increased Significance for REITs

When it comes to sustainability, REITs have made significant strides over the years in terms of environmental practices. They’re reducing energy and water use, lowering carbon footprints and improving waste management.

Yet, the idea of sustainability has come to encompass more than just environmental impact. More companies—and the stakeholders that monitor them—are broadening their definition of sustainability to include environmental, social and governance  factors, commonly referred to as ESG.

REITs certainly have had programs aimed at the social component, such as philanthropy, community involvement and health of employees. They’ve also continued to enhance their already strong governance practices over the years. Now, they are looking at how to systematize these components under the greater framework of corporate responsibility and how it aligns with a REIT’s overall strategy.

The refined approach makes business sense, since good social and governance policies have a material effect on the business in the long run. “It’s a matter of looking through the lens of triple-bottom line reporting and the fact that today for public companies, it’s not just the financials that are important for the business to be considered run well,” says Mark Delisi, senior director of corporate responsibility for AvalonBay Communities Inc. (NYSE: AVB). “Taking into account the ‘S’ and ‘G’ is table stakes for companies that are operating in the 21st century.”

Getting Engaged

The major reporting frameworks for sustainability now ask for information in the social and governance areas. The Global Reporting Initiative (GRI) and GRESB have increasingly integrated social and governance issues into their questionnaires over the years. GRI’s 2016 standards had 19 social categories, including areas such as employment, labor/management relations, training and education, diversity and equal opportunity, and local communities. GRESB, which is geared toward real estate companies, includes a stakeholder engagement section. Last year, it introduced a separate module for reporting on health and well-being for employees and products and services. The GRESB survey also has questions on governance practices.

The increasing focus on social and governance in part comes from investors, who are looking for a more holistic approach by companies. It’s more than just spreadsheets that predict a certain return for a company, says Dan Winters, head of the Americas for GRESB.

“Investing is an art not a science,” he says. “You have to manage a series of often unknown and complex business risks in order to get to a long-term return projection.”

Good social and governance policies will translate into better returns overall, experts say. It all starts with engaging stakeholders. Surveys of various constituents, such as investors, tenants, employees, vendors and communities, show what issues are important to them and how they see them impacting a business.

REITs are increasingly providing information on stakeholder engagement in their sustainability reports in the form of “materiality matrices,” four-quadrant grids that highlight the areas that are both important and have a high impact on business. For Boston Properties Inc. (NYSE: BXP), social issues of high impact and importance include public transportation, employee health, community involvement and employee training. Similarly, access to transit and amenities, local communities ranked high in the 2016 sustainability report for Kilroy Realty Corp. (NYSE: KRC), along with governance issues such as anti-corruption, transparency, environmental grievance mechanisms and environmental compliance. 

Health and Wellness

While it’s difficult to measure the effects of social initiatives, it’s clear they can have a positive effect on worker productivity and, by extension, profits. One area is health and well-being.

Certifications based on building “health” are gaining ground with some REITs. One of them, Fitwel, was developed in part by the U.S. Centers for Disease Control and Prevention (CDC) and the General Services Administration (GSA). It evaluates features of buildings such as access to fitness facilities, proximity to public transit, design of outdoor spaces, indoor air quality and healthy food options. Alexandria Real Estate Equities, Inc. (NYSE: ARE) and Kilroy are examples of REITs receiving certifications for some of their buildings.

“There is a lot that owners can do to improve health and well-being at their properties,” says Daniele Horton, founder and president of Verdani Partners, a sustainability consulting firm that advises real estate owners.

One of the properties under development for Kilroy, a mixed-use project in San Francisco, will include features focused on health and productivity, such as open stairwells, low-emitting construction materials and enhanced filtration to maintain indoor air quality. The site, 100 Hooper, will also encourage bike transport, with showers and lockers.

These things translate to the bottom line and are more material than quantifiable energy savings, notes Sara Neff, senior vice president of sustainability at Kilroy. “The gains from productivity of your employees can dwarf your utility bill,” she says. “It is the thing that tenants should be asking about, and the more sophisticated tenants are.”

In fact, air quality for employees has become an important consideration for tenants. Boston Properties’ 888 Boylston Street in Boston—a 17-story, 425,000-square-foot office building—has an HVAC system that provides 30 percent more fresh air and 50 percent more air changes per hour than a typical office building, without compromising energy performance.

“There is clear empirical evidence linking fresh air and daylight access with improved health and productivity,” says Ben Myers, sustainability manager at Boston Properties. “We are focused on providing indoor environments that maximize the potential of our customers.”  

By demonstrating leadership on ESG issues, Myers says Boston Properties is able to strengthen its relationship with the communities it serves. 

“As an owner and developer, it is useful during the permitting and approval process to have an established record of delivering sustainable projects that mutually benefit our shareholders, customers, and local community stakeholders,” he says.

“By being perceived in the marketplace as a green company, a sustainable company, it helps us as we approach municipal officials, through permitting and entitlement,” Myers adds. 

Aligning Social Goals to Company’s Mission

REITs are also starting to focus their giving by partnering with non-profits that make sense with their lines of business. These types of social initiatives come with a sense of “shared value,” Delisi explains.

“If every REIT looks in the mirror, they will see components of the ‘S’ and ‘G’ already in place,” he says. “The difference now is partly the intentionality and strategy behind it and how the ‘S’ has moved away from check writing to real shared value.”

For AvalonBay, this has meant concentrating in recent years on corporate giving for disaster preparedness, affordable housing and support for the disadvantaged.

However, the apartment REIT is taking steps beyond cash outlays. For example, AvalonBay gives to the Arlington Partnership for Affordable Housing, but it is also assisting the organization in the construction of libraries in some of its buildings, lending design expertise and helping out with book drives.

“We are getting involved with a lot of these organizations pretty deeply in terms of helping them not just with pure volunteers, but also with some of their business challenges,” Delisi says. “We can bring to bear some of our development expertise, operations expertise and our design expertise to help them solve these challenges.”

“We can find a way to do social investment, philanthropy, community investment and volunteerism, but have it also strategically mapped back to what is good for the company,” Delisi adds. “It is not a mutually exclusive proposition. Companies can and should be social investors while still making a profit.”

Good Governance Needed for Sustainable Success

While the social component of sustainability is gaining momentum with REITs, it wouldn’t amount to much without good governance.

There are the general corporate governance issues: executive compensation, shareholder rights, diversity and equal opportunity, bribery and corruption, and worker rights. (These are all now part of GRESB’s annual survey.) More specifically, REITs are starting to fold in governance issues with respect to sustainability in order for the “E” and the “S” to get done.

Governance with respect to sustainability can include setting the tone at the top of a firm with the chief executive, instituting a sustainability committee, and regularly reviewing the program with a company’s board of directors.

Diversity is another emerging area with respect to governance. Kimco Realty Corp. (NYSE: KIM), for example, has instituted an internal talent incubator dubbed “Leaders Advancing Business Strategies.” It groups teams with members across the organization. Women’s representation in the program in 2016 was in the high 30s in terms of percentage; this year their share is in the high 40s. The company also recently launched a training program exclusively for 40 female employees.

While it’s difficult to measure the qualitative nature of these types of programs, they do translate to the bottom line, notes Will Teichman, senior director of strategic operations at Kimco. Not all companies actively pursue them, though.

“In some cases, folks today are missing the real quantitative benefits that can come from things like employee engagement and employee retention,” he says. “Every time you lose a new employee and have to go backfill that position and train the new person, there are real dollars and cents associated with that.”

“If your tenants are diverse, your company leadership should also reflect that,” adds Horton of Verdani Partners. “Research shows that companies that have better gender diversity and leadership have been doing better financially because they are able to better understand their different consumer groups and preferences.”

Other governance measures are in their infancy for REITs. One that has gained some traction includes resiliency planning, such as preparing properties for floods and other disasters. For example, in a building under development by Boston Properties at the Brooklyn Naval Yard in New York, all critical equipment will rest 32 feet above grade. Onsite generators will provide 1,500 kilowatts of emergency power for building and tenant use.

Looking ahead, the REITs that view the “E,” the “S” and the “G” as intertwined say that approach will only help with the investors they court.

“Investors understand a robust sustainability program is an indicator of good governance,” Myers says. “They are still trying to figure out how to evaluate and incorporate sustainability into their models. They are not adjusting their positions distinctly because of a company’s sustainability program, but they may look favorably on your company because of governance.”  

Creating Dividends Through Diversity

Diane Morefield, CFO of CyrusOne(NASDAQ: CONE), sees a direct correlation between real estate companies that embrace women in leadership roles and enhanced shareholder value.

Companies that fail to recognize the essential role women play in helping to shape a broad swath of real estate-related decisions are “really missing out,” she says. Morefield says she has enjoyed a rewarding career in real estate, but she still sees the number of women in leadership roles within the industry as much too low.

“I haven’t seen the needle move,” she says.

NAREIT hopes its new Dividends Through Diversity Initiative, which launched earlier this year and held its kick-off reception at at REITWeek 2017, will take steps to change that. Morefield is chairing the initiative’s steering committee.

Bonnie Gottlieb, NAREIT’s senior vice president for industry and member affairs, says the stated goal of the initiative is to promote the recruitment, inclusion and advancement of women in REITs and the broader commercial real estate industry.

To that end, the Dividends Through Diversity Initiative will foster information sharing, education and career development, mentoring and networking events, among other things.

Two half-day meetings are expected to be held in the next 12 months featuring NAREIT members and nationally known speakers on diversity-related issues and career development. In addition, the initiative will select new associates at REITs or other NAREIT member companies who exemplify outstanding leadership qualities, to attend one of two half-day meetings.

“I really hope now that in the next five to 10 years, we see the needle move, that we start seeing more women in C-level roles and on boards across the REIT industry and the related companies that serve our industry,” Morefield says.

Dividends Through Diversity Initiative Steering Committee
Diane Morefield, CyrusOne; Angela Aman, Brixmor Property Group Inc; Kelly Cheng, Barclays; William Ferguson, Ferguson Partners Ltd.; Mary Hogan-Preusse, Sturgis Partners LLC; Lisa Kaufman, LaSalle Investment Management; Sheila McGrath, Evercore ISI; Marguerite Nader, Equity Lifestyle Properties, Inc.; Sherry Rexroad, BlackRock; Martin Stein, Jr., Regency Centers Corp.; Tracy Ward, Prologis, Inc.

(Why?)

Published at Wed, 26 Jul 2017 18:32:22 +0000

Dynex Gets Defensive to Tackle Interest Rate Risk

Dynex Capital, Inc.(NYSE: DX) has lived through more than a few interest rate cycles since it was created in 1988. Lately, the Mortgage REIT has taken a more defensive posture, as the company looks to secure itself against potential volatility caused by Federal Reserve rate hikes and global policy shifts.

Dynex, which is based in Virginia, invests in a portfolio of mortgage-backed securities (MBS) backed by both residential and commercial mortgage loans, 92 percent of which consist of high-rated agency securities, high-rated non-agency securities and interest-only loans on those securities. The rest of its portfolio consists of lower-rated non-agency MBS, as well as below investment-grade MBS, loans and mortgage servicing rights.

AT A GLANCE

Address:
4991 Lake Brook Drive, Suite 100
Glen Allen, VA 23060
Phone: 804.217.5800
Website:dynexcapital.com
Management Team:
Byron L. Boston, President, CEO & Co-CIO
Stephen J. Benedetti, EVP, CFO & COO
Smriti L. Popenoe, EVP & Co-CIO

Doug Harter, an analyst and director with Credit Suisse, says the structure of the company’s portfolio has set up Dynex to weather a rate-related storm.

“Rising [short-term interest] rates is generally a negative for Mortgage REITs,” he says. “Dynex is probably in the middle of the pack of our industry as far as exposure. A lot of the agency mortgage-backed securities they own are hybrid or adjustable-rate mortgages. That will limit their exposure somewhat.”

At the same time, the company has amassed cash to capitalize on any opportunities that crop up as a result of policy shifts.

Defensive Stance

President, CEO and Co-CIO Byron Boston has been with Dynex since 2008, taking over as the chief executive in 2014. His career spans many years in the fixed-income capital markets, including a stint as an MBS bond trader for Credit Suisse First Boston. He worked for Freddie Mac at one point and also founded a Mortgage REIT, Sunset Financial Resources.

Boston says Dynex’s management team takes a methodical approach to risk management and capital allocation. Combined with a rise in financing costs as interest rates have gone up, the company’s cautious stance had a hand in its year-over-year decline of 32 percent in net operating income per common share in the first quarter of 2017, according to Boston.

“The amount of income you are generating is directly related to the amount of risk you want to take and which risk you want to take,” he says. “We have chosen to be a little more cautious from a risk perspective, so we are a bit under-levered.”

“The amount of income you are generating is directly related to the amount of risk you want to take and which risk you want to take.”
– Byron Boston, President, CEO & Co-CIO, Dynex Capital

The company’s strategy has paid off over the long term. Although Dynex’s total returns trailed the FTSE NAREIT Mortgage REIT Index in 2015 and 2016, the company’s 15-year compound annual total return as of June 15 was 10.33 percent. Mortgage REITs produced total returns of 4.45 percent through June 15.

Fallout from Fed Moves

Going forward, Dynex’s performance appears tied to its ability to respond to changes in interest rate policy. The Fed’s three interest rate hikes from 2015 through early 2017 have driven up bond yields. Meanwhile, the moves have already increased Dynex’s financing and hedging costs, cutting into its earnings.

Boston takes prides in Dynex’s dynamic approach towards hedging: “We try to neutralize our portfolio more, but that could change as quickly as tomorrow.” As Eric Hagen, an analyst and assistant vice president with Keefe Bruyette & Woods, New York, notes, hedging involves a trade-off.

“When we model it out, under a smaller move in interest rates, hedges are typically effective. Under a much larger move in interest rates and credit spreads, if they were to correct sharply and unpredictably, that would not bode well,” Hagen says. “The call Mortgage REITs are making is, ‘Do I hedge myself when I think the storm is a thousand miles away? When it is two hundred miles away? When it is five miles away?’”

Monetary policy could also cut into the Dynex’s future earnings and book value as the yields on the 10-year Treasury shift. Additionally, the Federal Reserve will eventually unwind the holdings of MBS and Treasuries acquired as part of its quantitative easing efforts during the financial crisis. Harter expects the sales could widen spreads. In fact, agency spreads are already starting to widen as the Fed has talked about its plans to unwind the holdings. For instance, credit spreads on agency delegating underwriting and servicing (DUS) securities in Dynex’s portfolio have moved up from 59 basis points at the end of 2014 to 67 basis points at the end of the first quarter of 2017.

For his part, Boston is concentrating on the potential opportunities offered by unwinding.

“The Fed reducing their footprint in the mortgage sector will allow more entities such as Dynex to take on the role of managing those assets,” he says. “If they reduce their balance sheets, there’s a need for private capital and expertise in managing these housing-related assets.”

Favorable Factors

There are other offsetting factors working in favor of Dynex at the moment. They include the firm’s low leverage, according to Harter, which should give Dynex room to add debt and take advantage of wider spreads. “You would have a near-term decline followed by a potentially better earnings outlook,” he says. The firm had taken on debt financing at 5.8 times its equity capital at the end of the first quarter, down from 6.3 times at the end of 2016.

The future of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that play a role in providing home financing, also deserve consideration. President Donald J. Trump has yet to release definitive plans for GSE reform, but cutting back on the involvement of Fannie and Freddie in the mortgage market would add to the need for more private capital. Hence, another potential opportunity for Dynex.

The Trump administration’s moves to roll back regulation of the financial sector could also benefit Mortgage REITs by bringing back banks that had pulled away from the repo business, which is a major source of financing for Dynex. Furthermore, Boston sees potential for Dynex to consider other business strategies if some of the measures in the Dodd-Frank financial system reforms are removed. For example, Dynex cut down its exposure to loans because of stringent consumer protection measures implemented by the Consumer Financial Protection Bureau.

Demographics are also working in Dynex’s favor, according to Boston, given the need for housing in the United States. And Dynex’s yields appeal to investors. The REIT’s first quarter dividend of $0.18 made for an annualized return of about 10 percent.

Boston says he is focused on increasing Dynex’s global presence to gain access to more information. Today, the REIT is maintaining relations with entities that do have such reach. That way, the company can be attuned to factors that could impact the global risk environment.

Overall, Boston says he is working to secure Dynex in the face of the potential for “policy error” from any number of financial actors around the world.
“History is littered with government officials who made policy errors and created havoc for the globe as a whole,” he cautions. “That’s why we have emphasized highly liquid securities at this point.”

(Why?)

Published at Wed, 26 Jul 2017 14:42:17 +0000

Sustainability Issues Are Important to Real Estate Investors

Talk to executives at REITs and publicly traded real estate companies and they’ll attest that investors want to know more about sustainability. The people who decide how major funds make their real estate allocations are inquiring about everything from energy usage to employee diversity to wellness programs.

REIT magazine spoke with the heads of three institutional funds for input on how environmental, social and governance issues impact their investment decisions.

REIT: How does ESG play a role in your investment decisions, if at all? 

Mary Hogan-Preusse: I believe that ESG considerations are an essential component of the investing picture. I believe that talented management is a strong determinant of a stock’s long-term success, and I find that the best management teams do focus on ESG considerations because it’s the right thing to do.

Laura Craft: We value a REIT’s underlying real estate portfolio, and then we assess the REIT as an enterprise. On the portfolio valuation, we recognize that ESG projects can affect a REIT’s cash flow, as they result in higher revenue or lower operating expenses. The REIT enterprise is also valued, taking into account the enterprise’s management and ESG activities; discounts or premiums are applied to determine the value of the REIT.

ESG is a consideration for all of our investments, whether we first identify a REIT with a strong sustainability program or whether we identify a potential investment and then consider its sustainability program.

Beth Richtman: CalPERS’ real assets program has a set of sustainable investments practice guidelines. They form our approach to identifying, monitoring and managing ESG-related risks that may impact the performance of the investments.

When we consider investing in a real estate manager, we study their policies and practices. We factor those into a score we give managers.

At the asset level, we’ve developed a proprietary ESG consideration matrix that our real estate managers will be asked to use when underwriting real estate assets for CalPERS’ portfolio. This tool includes factors like climate change, resource scarcity, water risk, biodiversity, wellness. The goal is to ensure that these types of ESG factors are thought about before we buy an asset and that the costs and opportunities related to  those ESG factors are baked into the financial model.

REIT: Which elements within ESG are you focused on for a company? Do some carry more weight than others? 

Richtman: They may vary by asset type and location. In some areas, climate change risk is going to be more important to focus on than in other areas.

Energy efficiency is often low-hanging fruit with quite positive returns. We’re in year one of an energy-optimization initiative, through which we’re looking for opportunities in our assets related to energy demand, use and production. Overall, we want to know that the companies and managers underwriting the assets are identifying the relevant material risks and opportunities and factoring them into their asset selection and business strategy.

We want to be invested with managers and companies that are responding to tenant markets that increasingly demand or expect sustainability. 

Hogan-Preusse: I focus on all of them. I think about the “E,” the environmental component, in a couple of different ways. I expect a larger company with core-type assets to demonstrate a commitment to sustainability. I believe that for these companies, their size and scale makes the process of demonstrating sustainability metrics easier than for smaller companies, and in many instances I think that their target tenants demand some evidence of a commitment to sustainability from their landlords.

For smaller companies, I do understand that it may be difficult to provide evidence of industry standard measurements, but I expect them to be able to have the conversation and demonstrate in other ways their commitment to environmental stability.

Craft: Governance issues are the most relevant to REITs and have the greatest impact on our valuations.

As shareholders, we are part owners of the firm and we need to understand how management teams and boards have structured the company to ensure alignment of interests with us. Furthermore, high governance ratings could link to leadership on environmental and social factors. 

Beyond the REIT enterprise, environmental activities in the underlying real estate portfolio are also a focus to understand if environmental opportunities have been identified and implemented. 

REIT: What about social and governance factors?

Hogan-Preusse: Since I focus on REITs and public real estate companies, there is an element of self-selection. Many social concerns seen in other industries (weapons, land mines, animal welfare) generally do not apply. Social metrics that I examine include ethical issues such as diversity—inclusivity, really—at the corporate and board levels and certain labor-related issues.

“G”—governance—I examine issues including the quality of management, the quality and composition of the board, and executive compensation. I think that the relationship between management and boards and between management and employees is an extremely important concern, but one that is hard to measure.

REIT: What data and tools do you use for your analysis? 

Hogan-Preusse: Lots of things, including data provided by companies and published by GRESB, company information and proxies, the sustainability section of their web sites (everyone should have these) and management interviews.

Richtman: We’re currently rolling out GRESB across our real assets portfolio – just this year we started asking our real estate managers to fill it out.

For our global equity portfolio which holds our REITs, we are using MSCI’s ESG Manager Tool which provides reports and letter grades for REITs.

Craft: Our own analysts and portfolio managers incorporate ESG analysis as part of their normal research process to identify any ESG-related issues or initiatives that might affect a company’s valuation. We rely on a REIT’s financial filings, augmented by our own primary research conducted by touring properties and meeting with management teams.

Some REITs produce detailed sustainability reports, quantifying what they are doing on the ESG front, backed with data to quantify the cost and impact of ESG efforts. Such disclosure is helpful.

We do subscribe to third-party ESG data sources, which pull in information from various public or private data inputs. However, an overall ESG rating can be confusing and misleading if taken out of context. This is where a company’s sustainability report can become an important avenue for identifying material ESG factors and quantifying ESG activities and impacts. 

REIT: Do you think we’re approaching an investing world that identifies consistent methodologies for collecting and analyzing ESG data for decision making?

Hogan-Preusse: Not yet.

Craft: The industry is moving closer to consistent methods but it still has a ways to go. ESG ratings vary in approach, materiality, weighting and comprehensiveness. Additionally, the REITs themselves vary in geographic location, property type, operational control, and portfolio composition. As a result, ESG data sets need to be taken in context.  

Richtman: I think the industry has come a long way in terms of terms tracking and reporting. However, I imagine that sustainability officers at REITs must be somewhat overwhelmed by as many surveys as they currently have to fill out; over time hopefully reporting requirements can be streamlined to be useful to investors, consistent and not overly burdensome.

One particular area that I hope improves is climate risk to assets. I don’t think there’s currently a great tool for investors yet. My dream tool would be a ZIP code scenario analysis showing the physical risk, resiliency of the surrounding infrastructure, and estimating climate change related tax and insurance risks for a particular asset or portfolio.

REIT: How does sustainability impact your fundraising efforts? 

Craft: The frequency of investor questions about how we incorporate ESG into our investment process is increasing. Right now, investors are most interested in knowing that we are monitoring ESG efforts and impacts as part of our valuation process, rather than specifying ESG-related terms or fund attributes.

REIT: Do you see any opportunities for REITs and/or REIT investment managers to help educate source capital in this area?

Craft: Definitely. Investors never want to feel left behind, so as the awareness of ESG continues to grow, opportunities to educate investors on its importance will expand accordingly.

Richtman: One thing that would be useful is to provide data and participate in studies about what ESG practices are economically beneficial. It’s great as an investor to read about greenhouse gas reductions or decreased energy use, but it gets a little bit more exciting when we learn about how much money was saved or how it might improve the type of returns.

Kilroy Realty Corp. (NYSE: KRC) uses SASB’s standards in its 10-K, which is a great example of a REIT educating the market. It elevated their sustainability efforts by showing they’re material to their business.

Hogan-Preusse: I think NAREIT has done an excellent job of publicizing and monitoring this issue through its Leader in the Light program. The GRESB survey provides a helpful yardstick for comparing companies, which will only get better over time as the survey is further refined and we have more years of data to compare.

Because the public real estate industry is so transparent and was a relatively early adopter of ESG initiatives, I think that a REIT fund whose investments all demonstrate strong commitments and performance on ESG initiatives and metrics would be a welcome investment choice for pension funds and other socially responsible investors.

REIT: What can REITs do better to improve the quality of their ESG data?

Craft: REITs need to set clear boundaries on the areas that they can and can’t control. REITs can understand their portfolio exposure and annual average loss (AAL) ascribed from insurance on their geographic environmental risks, quantify the percentage of the portfolio that they have operation control over and pay utilities on, report on the sustainability ROI projects, highlight innovative technologies and practices, and give insight into activities taken that increase occupier retention.

REITs have limited control over occupant behavior and operations and usage of their rented space, including utility consumption. In many cases, REITs will not have access to occupants’ utility information, as occupants will pay utility companies directly for their usage. REITs should not spend considerable amounts of time tracking data that they do not control and pay the bills for; REITs should focus time and efforts on controllable data and operations.

Richtman: It’s helpful to not only get a snapshot of where a company is today, but also where it’s going. How are they looking at risks and opportunities related to ESG? Most importantly, what are they doing about them?

REIT: What do you recommend for REITs that are just starting a sustainability program or trying to revamp their strategy? 

Richtman: Research what other real estate managers are doing. I’d consider hiring a consultant or staff with expertise in this area. 

Hogan-Preusse: My best advice is also one of my favorite sayings: “Do not let the perfect be the enemy of the good.” I know that extensive surveys like GRESB can be daunting for smaller companies. Additionally, many companies are not ready to make the commitment to check every box in terms of what it takes to achieve best-in-class social and governance standards.

Something is better than nothing. Post something on your website demonstrating your commitment to sustainability in smaller ways, from recycling to development standards to environmentally friendly transportation opportunities.

Even if you “can’t find the right people to improve diversity at your organization,” why don’t you focus on finding just one? Trust me, you can find one person. Even better, how about establishing a mentoring or training program to create future leaders who will fulfill these criteria?

Address governance concerns that investors are posing to you head on, and be as transparent as possible.

Craft: Focus on improving the ESG factors and initiatives that will improve portfolio performance and publicly disclose sustainability efforts and projects with quantifiable numbers.

Public disclosure will help in the passive ESG ratings and in valuing a REIT. As an REIT investor, we are always trying to derive a better valuation for each company, so the more companies can disclose on ESG issues the better. 

(Why?)

Published at Wed, 26 Jul 2017 15:26:28 +0000

4 Quick Questions with Sander Paul van Tongeren, Managing Director of GRESB

How has the scope of GRESB changed over time?

Since 2009, GRESB has expanded its real estate coverage beyond private equity firms to include many U.S.-based REITs and a growing group of listed property companies globally. We continue to experience a strong uptick in REIT participation as the industry seeks to benchmark ESG best practices against its peers.

I’m excited about two areas of growing interest. First, the GRESB Infrastructure Assessment launched in 2016, which broadened our ESG coverage to include all real asset classes. Secondly, the GRESB Debt Assessment covers the full real estate capital stack. This ESG engagement framework is relevant to the Mortgage REITs that are part of NAREIT.

For the first time, GRESB has set participation targets for 2017. Why is now the right time to set such goals?

During GRESB’s early years, our focus was to improve the GRESB assessments, invest in technology and streamline the annual data collection process. The GRESB portal is now state of the art, industry engagement is strong at nearly 60 percent of global REITs by market capitalization and our data validation process is robust.

GRESB has become the global standard with $2.8 trillion of real estate companies and funds benchmarked using the GRESB Real Estate Assessment in 2016. We anticipate our first Canadian REIT participants in 2017 and see additional interest in Latin America.

What are some of the other initiatives we can expect to see from GRESB in the near future?

The GRESB team is working on three near-term initiatives. This year, we are releasing the GRESB Public Disclosure Level, a new feature providing investors with insights not captured in the real estate assessment data.

Importantly, the level includes companies participating in the GRESB real estate assessment as well as the roughly 200 listed property companies yet to report.

We are also moving towards a GRESB assessment process that is less year-specific, removing pressure for participants to report during a three-month time window. We will introduce this new streamlined functionality in the second half of 2017, allowing REITs to update their information anytime throughout the year.

North American companies and funds continue to lag their global counterparts. Do you see this changing anytime soon?

It’s clear from the five-year trend that the U.S. market continues to improve its ESG performance. On a regional basis, U.S. REITs outperform U.S. private equity funds in terms of ESG performance by a significant margin.

By comparison, Australia receives accolades for its sustainability leadership, as they should. ESG permeates their financial sector, and being centralized in Sydney provides certain synergies and knowledge-sharing advantages. But, the U.S. has certain structural advantages, including a very strong economy with competent and equally competitive professionals.

With NAREIT Leader in the Light Award winners leading the way, one can look toward the GRESB 2020 results as a time when certain property subsectors of North America could overtake their Australian counterparts.

Sander Paul van Tongeren is managing director and co-founder of Amsterdam-based GRESB, an investor-driven organization committed to assessing the environmental, social and governance (ESG) performance of real assets globally, including real estate portfolios, real estate debt and infrastructure.

(Why?)

Published at Tue, 25 Jul 2017 15:14:31 +0000

One-on-One with Equity Residential CEO David Neithercut

David Neithercut, CEO of Equity Residential(NYSE: EQR), says the company’s mission of providing residents a “great place to live” in the country’s most interesting and dynamic cities creates a sense of excitement that can be felt throughout the entire organization.

“From the top of the house to the bottom, we all understand that goal, and we all love what we do,” Neithercut says. 

Neithercut joined Equity Residential Founder and Chairman Sam Zell’s Equity Group Investments in 1990 and later became CFO of Equity Residential shortly after it went public in 1993. He was named Equity Residential’s president and CEO in 2006. Within eight years of its initial public offering, Equity Residential became the first apartment REIT to be listed in the S&P 500. The company has also been recognized numerous times by Fortune magazine as one of the world’s most admired companies in the real estate sector under Neithercut’s watch, and he has been recognized several times in Institutional Investor magazine’s surveys as one of the best REIT CEOs.

Neithercut also presided over Equity Residential’s most significant acquisition to date following a multi-year pursuit and the receipt of a $150 million break-up fee – the $9 billion purchase of 60 percent of the Archstone apartment portfolio from Lehman Brothers Holdings Inc. in 2013. The deal allowed the company to significantly accelerate its long-term strategic goal of focusing on high-density, urban assets.

Neithercut, a former NAREIT chair, recently spoke with REIT magazine about some of the factors behind Equity Residential’s achievements, the current outlook for the multifamily industry and the importance of having passion for your work.

REIT: What characteristics do you value most in the management team you have established at Equity Residential?

DAVID NEITHERCUT:  I strongly believe that we all share a sense of a common purpose. At the executive committee level, I know that we are very much aligned on everything. Our compensation program is one that has shared goals. No individual does well unless everyone else does well, so I really think that’s very important.

Up Close

Age: 61
Education: BA, St. Lawrence University; MBA, Columbia University
Family: Wife of 35 years, Suzu; Daughter, Emiko, 31; Son, Ben, 30
Hobbies: Skiing, cycling and sailing
Favorite vacation spot: Northern Michigan
Favorite film: “The Godfather”
Recently read: “The River of Doubt: Theodore Roosevelt’s Darkest Journey”
Professional/community activities: Board of LINK Unlimited Scholars; Board of Lurie Children’s Hospital; Advisory Board of the Joint Center of Housing Studies at Harvard University; past NAREIT Chair; and the MBA Real Estate Program at Columbia University

The culture of the company runs really deep. It started with the culture Sam Zell instilled in Equity Group Investments and 24 years later we still really embrace it. You either live it or you decide to work somewhere else. It’s not uncommon for people who leave here to come back because they didn’t appreciate how important culture is to an organization. 

REIT: What is your proudest achievement during your 11-year tenure as CEO?

NEITHERCUT:  Looking back, I think that the single most important thing we’ve achieved as an organization is the total transformation of our portfolio from one that used to exist in 50 markets and substantially comprised suburban, garden apartments to one now that is focused on high-density, coastal urban and highly walkable close-in suburban markets. That’s been a big change.

Our portfolio today has the highest walk scores in the public (apartment) space. As we continue to think about the jobs our economy is going to create going forward and where those jobs will be located, and as we think about the continued re-urbanization of the country, we are really excited about the repositioning we’ve done and where we are located today and for the future.

REIT:  EQR has been actively disposing of non-core assets. What impact has the sale of close to $7 billion in properties in 2016 had on the company?

NEITHERCUT:  It was really the grand finale that was needed to exit what we recognized were not going to be our long-term markets and to finally have our portfolio 100 percent in these coastal gateway markets. It wasn’t easy to part with that much capital but it was the right thing to do for our shareholders and the timing was close to perfect.

REIT: The past decade has been a particularly strong one for the multifamily sector by almost any measure of fundamentals. Is it now heading into a more sustainable, long-term level of growth?

NEITHERCUT:  We clearly had a terrific run coming out of the great recession. The economy was improving, we had incredibly favorable demographics and very little new supply had been built. We had a three or four year run that was about as good as any of us had ever seen in the multifamily space.

Today, while the demand characteristics remain very strong, we do have more supply in these markets so things have softened a little bit. We think that supply is going to peak this year and will begin to moderate in 2018 and beyond.

That said, we think we’ll continue to have a very favorable run ahead of us. The demographic picture remains strong. Within the millennial generation, the single largest age group of that segment is only 25 or 26 years old. The median age of our resident today is 34. We see this segment of the population continuing to be interested in living in high-density cities, attracted to the jobs that are being created by our knowledge-based economy. We see them marrying and having children later in life and really embracing the flexibility and optionality that rental housing provides in these great cities.

We’ve taken a little bit of a pause this year as a result of the new supply. We’ve seen a moderation in our revenue growth, and while I’m not suggesting we’ll get back to where we were in 2012 or 2013, I see no reason why we won’t very soon get back to revenue growth levels that are above long-term historical trends.

REIT: You have said that the focus in 2017 is on retaining residents. What steps is EQR taking to achieve that and how are the results looking so far?

NEITHERCUT: It’s really about service, service and service—making sure we’ve satisfied our existing residents. Most of our employees work on-site, taking care of our residents and so it’s really a top-to-bottom focus. It’s about providing remarkable service to get them to renew with us when their leases expire and hopefully extend their stay with us and say good things about us to their family and friends and to encourage more people to live with us.

We’re also spending some more capital this year on customer-facing projects like lobbies, health clubs and common areas to make our properties competitive in this more challenging market. We’re very pleased that our retention rate has improved this year, at least through the first quarter compared to a year ago. It seems like everything we’re doing is working.

REIT: How hard is it to distinguish between short-lived fads in the multifamily business and trends that have actual sticking power?

NEITHERCUT: When you are investing massive amounts of capital and building these assets, one has to be very cautious about short-term trends. We’re building long-lived assets, and we need to be more focused on long-lived trends. One reason we like the high-density urban market is that we think that those markets will be in great demand for a long time.

Short-term fads can be very value destructive. People are doing a lot of purpose-built housing today, which is something we’ve stayed away from. You hear about WeWork and now WeLive and those are fads where we have no idea how long they may last. We are really focused on these highly-walkable locations in gateway cities that we believe are going to attract any demographic. While we have a lot of millennials, 20 percent of our units are occupied by those 50 and older.

There’s no asset we own that is specifically targeting one demographic or another. We buy well-located properties that will appeal to every demographic in the spectrum interested in living in a high-density, walkable environment.

REIT: One trend that seems to have staying power is a shift to smaller apartments and more communal living. How has that played a role for your company?

NEITHERCUT: Indeed, we have units that are as small as 225 square feet. Residents don’t actually live in those units. When they are not at work, which for many is 12 to 15 hours a day, they’re in the coffee shops, bars, restaurants, health clubs and parks. They sleep in these units, store their belongings there, but they live in the city, on the rooftop, in the media room. It was a real awakening when I showed these units to my board and they realized that their idea of living in a unit is much different than that of a young, single person enjoying the big city.

The smaller units are a function of the high cost of housing in these markets. It doesn’t make any sense to build a huge unit because it costs the same amount per square foot and would require rent that most people are unwilling to pay. It’s an economic reality of life in the big city. 

REIT: Equity Residential has been singled out for its sustainability achievements by GRESB and NAREIT. Where do sustainability and corporate responsibility fit within the overall strategy of the company?

NEITHERCUT: Sustainability, corporate social responsibility, diversity and our employee’s total well-being—their personal, financial, career, social and community well-being—are all part of our core values. Adherence to these values is one of the shared goals of our senior management team. As to sustainability, we’re really focused on a people, planet, profits approach and that has served us well.

There was a time when putting LED lights in a property didn’t make sense because of the cost. When those lights came down in price and it made economic sense, we hit it really hard.  Today, we’ve got solar panels on most of our properties that have swimming pools to help heat them. For some time, we’ve used co-generation systems at several assets in Manhattan in order to decrease our use of grid power. We’re also very conscious about water conservation and have numerous programs that have produced incredible reductions in our water usage. We’re very pleased that all those efforts have been recognized as that of a global leader in sustainability.

REIT: As an advisor to the Columbia Business School MBA real estate program, what traits do you think are important for the next generation of leaders?

NEITHERCUT:  Putting aside real estate, you need a passion for whatever you want to do. I think you have to be curious, you have to have a desire to always be learning—that’s a very important trait. Today, you’ve also got to be agile. You need to be comfortable with change; you need to embrace it and can’t be afraid of it. If you are, I don’t think you’re going to go terribly far.

You also need to be able to work with diverse teams in a highly collaborative environment. If you’ve got passion and you’re curious and you’re agile and you’ve got an ability to work with teams, I think you can be successful in whatever it is you want to do. 

Neithercut emphasizes the importance of corporate culture, and believes it is important that his executive team shares a common purpose. Pictured left to right: Bruce Strohm, EVP, general counsel and corporate secretary; Mark Parrell, EVP and CFO; Neithercut; Alan George, EVP and CIO; Christa Sorenson, EVP of human resources; and David Santee, EVP and COO. 

(Why?)

Published at Tue, 25 Jul 2017 15:44:13 +0000