Real Estate Investment Trusts

Canadian REITs in Transition

While large Canadian asset managers, pension funds and pension fund companies have been roaming around the world buying real estate and infrastructure assets, Canadian REITs have also been quietly moving beyond Canadian borders to grow their portfolios.

To be sure, the Canadian domestic real estate investment markets have been strong in most non-oil and gas economy cities. The Bank of Canada is calling for real GDP growth in 2017 of 2.8 percent, which would be the strongest in the G7 countries. The Canadian REIT Index yields 5.9 percent—which is a healthy spread over the 10-year Canada Bond (yielding 2.03 percent as of July 31).

On the other hand, capital values in the public markets have lagged, with the Toronto Stock Exchange (TSX) Composite Index up only 1.5 percent for the first seven months of 2017, and the TSX Capped REIT Index up 2.5 percent over the same period. That lags well behind the FTSE NAREIT Composite Index, which posted a 6.8 percent total return over the same period.

Perhaps that is why the market for new REIT IPOs in Canada has been slow. We had two REIT IPOs in 2016: Mainstreet Health REIT (U.S. sponsored), and the European Commercial REIT (targeted at Europe). To date, there have been no Canadian REIT IPOs in 2017.

What’s really driving this internationalization of Canadian REITs? There are two categories to consider. The first would be Canadian REITs venturing into foreign markets to find growth. The second would be foreign-sponsored REITs, typically with management teams from the U.S., listing on the TSX and raising Canadian capital to grow their asset base in that foreign market.

Canadian REITs have been active in foreign markets for quite some time; and those with sizeable U.S. holdings include Slate Retail REIT, H&R REIT, Pure Industrial REIT, Morguard Residential REIT and American Hotel Income Properties REIT. Those with substantial footprints in Europe include Dream Global REIT, Granite REIT, Inovalis REIT and CAPREIT (and its affiliate REIT). U.S. management team–sponsored REITs listed on the TSX include Milestone Apartment REIT (taken private earlier this year), Mainstreet Health REIT and WPT Industrial REIT.

Having said that, RioCan REIT, the largest Canadian REIT, has sold off its U.S. assets over the last several years to focus more on its core Canadian asset base, acquiring more properties and focusing on intensification of its domestic assets.

With fierce competition for high-quality and stable income-producing assets in key Canadian markets, it’s no wonder that many Canadian REITs have decided to develop new product. For many Canadian REITs, this has meant a new pipeline of high-quality assets that the market is beginning to recognize. Development risk seems manageable in an environment where demand is still high in two or three key cities, financing is available, and the development skill sets in-house in many Canadian REITs are now reaching maturity. Good results will come as markets begin to re-appreciate these fundamentals and oil- and gas-based markets adjust.

(Why?)

Published at Wed, 20 Sep 2017 17:45:23 +0000

Iron Mountain's Global Mandate

Priceless art is a hot topic at Iron Mountain Inc.(NYSE: IRM), but you won’t find masterpieces adorning the walls of the company’s offices.

Instead, they’re all locked away in the ultra-secure storage facilities of Crozier Fine Arts, which was purchased by Iron Mountain in 2015 to add to its array of storage and information management real estate offerings. The Boston-based REIT owns and operates facilities at 1,400 sites in 52 countries around the world. Its customers include roughly 95 percent of the Fortune 1000 companies.

A small percentage of Iron Mountain’s business involves storing unique assets. Even though the company has the master copies of interviews conducted by director Steven Spielberg with Holocaust survivors in connection to the release of the Oscar-winning film “Schindler’s List,” Iron Mountain’s primary focus lies in providing the real estate to store paper documents and computer tapes for corporate clients.

“We may be a pretty boring business,” jokes CEO Bill Meaney, “but we are very durable.”

Stability comes up as a theme, too, when analysts talk about the company.

Andrew Wittman of Baird Equity Research notes that Iron Mountain’s underlying business is “continuing to prove more resilient than expected.” Andrew Steinerman, an analyst who covers Iron Mountain for J.P. Morgan, likens the business storage REIT to being “as reliable as [pro basketball superstar] Steph Curry” from three-point range. He praises the company’s management team for balancing its longstanding orientation toward physical records with the demands of an evolving economy.

In the five years since Meaney became CEO, Iron Mountain has set its sights on enhancing its position as a truly global company. Meanwhile, Meaney says, it is working to refine the real estate solutions it can provide to become a one-stop shop for corporate clients.

From Mushrooms on a Mountain…

Iron Mountain, which was originally known as Iron Mountain Atomic Storage, took root in 1951 at the hands of former mushroom farmer Herman Knaust. Based in the Hudson River Valley, he initially targeted corporate clientele from the New York metropolitan area.

Knaust offered them a safe place to store documents: an old iron ore mine purchased in the 1930s to farm his fungi. (Hence the Iron Mountain name.)

By 1980, Iron Mountain was eyeing expansion beyond New York. It started with purchases of land and facilities in New England. Eventually, the company was setting up shop in all the major U.S. markets.

Iron Mountain held an initial public offering in 1996, and in 2012, the company’s board of directors approved a plan to become a REIT. It began operating as a REIT on the first day of 2014.

Meet Mr. Meaney

Meaney became CEO of Iron Mountain in 2013 following Richard Reese’s second stint as chief executive. Meaney, a former CIA officer, had a lengthy track record in the international arena. Immediately prior to joining Iron Mountain, he spent eight years as CEO of The Zuellig Group, a $12 billion business-to-business conglomerate based in Hong Kong.

“I’ve spent almost all of my career outside the United States,” he says. “The thing that attracted me to Iron Mountain is that it already was a very strong and very global brand, but its global presence was still fairly limited.”

Meaney set to work improving Iron Mountain’s global visibility. One of his primary objectives became operating in fast-growing emerging markets in places like Asia and South America. Eventually, the company set a goal of generating at least 20 percent of Iron Mountain’s sales from emerging markets by the year 2020.

The business storage REIT is currently ahead of schedule. Iron Mountain’s business in emerging markets grew from 10 percent of its total portfolio when Meaney took over to 18 percent in the second quarter of this year.

“While we’re growing in every market, including in our most developed market in the United States, we have the fastest growth in those emerging markets,” Meaney remarks.

Total Recall

To help meet its global mandate, Iron Mountain has made its presence felt in the transactions market. Its biggest deal came in 2016 with the acquisition of international competitor Recall Holdings for $2 billion.

Meaney cites a number of benefits derived from the combination of the two companies. First, a handful of major global corporations are looking for a single source from which they can quickly retrieve documents anywhere around the world, he says.

Other customers want the security of partnering with “the clear market leader,” Meaney notes. “With the Recall acquisition, we feel confident that is Iron Mountain.”

Once it had Recall under its umbrella, Iron Mountain could fortify some of the weak spots in the company’s global portfolio. Notably, this included the Southeast Asia region, where Recall was a stronger player.

Additionally, Meaney points out that profit margins on Recall’s operations have grown since the acquisition. Prior to the deal, Recall was attempting to compete globally, but doing so at roughly a quarter of the size of Iron Mountain, according to Meaney.

Meanwhile, J.P. Morgan’s analysts estimate that Iron Mountain will realize $80 million in annual costs savings in 2017 from the Recall deal. They’re estimating those annual savings to grow to $105 million as of 2020.

So far, Karin Ford, a REIT analyst with MUFG Securities Americas Inc., says the acquisition appears to be paying off.

“We expect Iron Mountain to accelerate its FFO and dividend growth in 2017 as a result of overhead cost savings and synergies generated by its merger with Recall Holdings,” she wrote in a note to investors following Iron Mountain’s second quarter earnings call in July.

Paper Chase and Server Space

As Iron Mountain continues its global expansion, the ever-growing share of work being done digitally and stored in the cloud naturally raises questions about the viability of its foundation in real estate for retaining paper records.

Meaney, however, takes a more macro view of what it is that Iron Mountain has to offer. He emphasizes providing “enterprise storage solutions” with the ability to address all of a company’s needs through “adjacent” lines of business to paper storage. While its paper storage customers keep their boxes with Iron Mountain for an average of 15 years, the company has seen the entry point of the customer conversation shift from a storage-centric one.

“For most of our customers today, the discussion starts with how Iron Mountain can help your digital transformation,” Meaney says. 

That led to Iron Mountain’s entry into data centers, a real estate sector that seems to be a natural fit with the company’s core business. According to Meaney, existing customers actually came to the company in search of digital storage space, which prompted the move into the sector. 

“We view Iron Mountain’s expanding focus on data centers positively, given strong demand trends as well as natural synergies with its traditional customer base,” Ford says.

Iron Mountain’s expansion in data centers has proceeded deliberately through a mix of development projects and M&A. “We’re very disciplined in terms of our return criteria” for data center assets, Meaney says. 

Iron Mountain now leases space to multiple tenants in each of its four data center facilities in Boston, Pittsburgh, Kansas City and Northern Virginia. In July, the business storage REIT announced a $130 million deal to acquire FORTRUST, a private data center company in Denver.

In comparison, Equinix(NASDAQ: EQIX), the largest data center REIT, owns 182 data centers in more than 20 countries.

“Iron Mountain’s data center business is relatively small at the moment, but has seen a nice growth trajectory,” Steinerman says.

An Ongoing Challenge

In terms of what’s next for the business-to-business storage REIT, Meaney says Iron Mountain’s top priority will be maintaining the strength of paper storage-centric business. Storage accounted for 83 percent of Iron Mountain’s net profit margins in the second quarter of 2017 and 62 percent of the company’s $950 million in total revenues, which grew more than 8 percent from the year-earlier period.

Ironically, though, communicating with the investment community about the strength of Iron Mountain’s core storage operations will remain one of the company’s greatest challenges, according to Meaney.

He says he recognizes that the “low-tech” nature of the business in an increasingly high-tech world means investors will continue to raise questions—even as Iron Mountain chugs along.

“You can consider us to the enterprise what the self-storage companies are to the consumer,” Meaney says. “The challenge is just getting the equity markets to understand and really appreciate the durability of the business.” 

(Why?)

Published at Wed, 20 Sep 2017 15:01:55 +0000

Health Care REITs Thrive as Americans Age

Aging may slow people down, but rising numbers of seniors and growing longevity are revving up demand for medical services and health care real estate.

“Owners of health care properties enjoy a luxury very few businesses have, which is that because of the longevity schematic, we do not have to worry about demand,” says Bob Probst, executive vice president and chief financial officer of Ventas(NYSE: VTR). The Pew Research Center says that about 10,000 baby boomers per day have been turning 65 since 2011, a trend that will hold up through 2030. The coming “Silver Tsunami” creates a tremendous need for solutions to health care challenges—and a huge opportunity for health care REITs, says Tom DeRosa, CEO of Welltower(NYSE: HCN).

For instance, DeRosa maintains that health care REITs have a big opportunity to reinvent hospitals and take outmoded, expensive properties out of service.

“To successfully improve the delivery of health care in this country, real estate has to have a seat at the table where innovation is occurring,” he says.

Aging’s Uneven Impact

“The baby boomer generation is like a huge pig that needs to work its way through a snake,” says Jordan Sadler, an equity research analyst at Key Banc Capital Markets. “People in their 80s tend to go to the doctor with more frequency than those below age 65. As the baby boomers age, there will be increased demand throughout the continuum of care that will first impact medical office buildings, then hospitals, then ultimately senior housing and skilled nursing centers.”

Sector Stats

Sector: Health Care
Constituents: 19
One-year Return: -5.06%
Three-Year Return: 7.23%
Five-Year Return: 6.18%
Dividend Yield: 5.2%
Market Cap ($M): 105,233.0
Avg. Daily Volume (Shares): 1,262.29
(Data as of August 23, 2017)

DeRosa sees new senior housing facilities, in partnership with academic and super-regional health care systems, as a solution to provide wellness services for the aging population to deal with frailty and dementia.

“Our broad goal is to create a new class of real estate that can improve health outcomes for people while at the same time cutting costs,” he says.

According to the Census Bureau, there were 5.8 million Americans age 85 or older in 2010. By 2030, there will be an estimated 8.7 million. By 2050, an estimated 19 million people will be 85 or older, approximately 21 percent of the entire population.

Generalist investors looking to capitalize on these demographics are investing in health care real estate, according to Probst. Yet, companies within the sector are taking advantage using different strategies. HCP(NYSE: HCP), for example, has limited its exposure to market segments that are dependent on government reimbursement, such as skilled nursing and hospitals. Instead, the company is focusing on private pay lines of business, including senior housing, medical office buildings and life science properties.

“The powerful demographic trend of an aging population should act as a tailwind for health care real estate,” says HCP CEO Tom Herzog. “However, we believe demographics alone will not guarantee increased tenant demand or translate into strong and sustainable real estate returns for all owners across the health care spectrum.” 

Demographics drive demand for all medical properties, but various asset types react differently.

Senior Housing

Peter Martin, a senior analyst with JMP Securities, says that population growth among those 80 and older will increase demand for senior housing in the future. Still, supply is the watchword for most observers of the senior housing segment.

“There’s a broad-based supply issue in senior housing, although the construction pipeline may have peaked in mid-2017,” says Sadler. “And yet, there is a woefully small supply in New York City and some other gateway cities.”

While Herzog acknowledges the headwinds from new supply on senior housing, he says construction deliveries should normalize by mid-2018. “Additionally, baby boomers begin turning 75 in 2020 and the over-75 population will grow by almost 50 percent over the next decade,” he says.

Sabra Health Care REIT (NASDAQ: SBRA) is focusing on developing senior housing in lower-cost secondary and tertiary markets.

“Senior housing was overbuilt in many markets and then hurt badly by the recession, but now they’ve adopted a new philosophy that these are centers for residents to age-in-place and get help with mobility and cognitive issues,” says Rick Matros, CEO of Sabra. “They have become a private-pay, lighter version of skilled nursing facilities.”

Matros believes construction of senior housing will slow in some markets as developers wait for absorption and vacancy rates to rise.

Probst says that while there are pockets of the country where construction of senior housing has outpaced demand, Ventas focuses on markets with high barriers to entry, high-income households and sturdy home values.

“We looked at data from high- and low-cost markets and found that its twice as expensive to stay at home and receive the services provided in senior housing,” Probst says. “So we see the economic value of senior housing as well as the social value of increasing the quality of life and the sense of community for seniors.”

Skilled Nursing

Sadler notes the supply of skilled nursing centers is limited, with the number of available beds falling. Yet, demand is anticipated to rise as the population ages. From an investment viewpoint, the risk of investing in skilled nursing facilities comes from the volatility of government reimbursement, which puts pressure on the operations side of the business.

“Ventas, HCP and Welltower have been selling or spinning off their skilled nursing center investments because of the overall fear of the squeeze of government reimbursements,” Sadler says.

According to John McRoberts, CEO of MedEquities Realty Trust(NYSE: MRT), there’s no oversupply of acute or post-acute facilities. The greying of America means that demand will be there, he says. 

“The big challenge is all about reimbursement and finding successful operators,” says McRoberts. “Our job is to identify those successful operators who can adapt, to invest in their IT and to provide the capital to help them adapt. Ultimately, we try to see which companies can provide sustainable cash flow and still provide quality outcomes for patients.”

Matros points out that Sabra has a more bullish view of the skilled nursing segment than many real estate investors.

“Skilled nursing facilities sometimes feel like ping-pong within the REIT world, since they were the darlings of investors a few years ago and then became less popular,” he says. “We like skilled nursing because we know the business and we have good operators. We feel the investment community just doesn’t understand them very well.”

Hospitals

Fifty percent of hospital utilization comes from people older than 65, and an 80-year-old is eight times more likely to use a hospital than an 18-year-old, says Edward Aldag, CEO of Medical Properties Trust(NYSE: MPW). Medical Properties Trust’s portfolio is 100 percent invested in hospitals, about 30 percent of which are in Western Europe, with the rest in the U.S.

“Very few new hospitals are being built, but value can be added through the reconfiguration of existing space,” Aldag says.

Aldag points out that hospital utilization went up during the recession. That helped investors understand how hospitals can provide protection from downside risks, according Medical Properties’ CEO. That can be a selling point to investors, even if the assets don’t have the same level of growth potential.

Medical Office Buildings

Medical office buildings are among the lowest cost settings for medical services, says Sadler. As a result, demand is strong for this property type, particularly in locations affiliated with hospitals.

HCP is investing in the segment, betting that the current direction of health care delivery will hold up.

“HCP has benefitted from the trend of acute services shifting out of high-cost hospitals to lower-cost outpatient settings like those in our medical office buildings,” Herzog says. “A continuation of the outpatient trend, along with a rapidly aging population that requires more health care services, should provide tailwinds to our medical office properties.”

Future Challenges and Opportunities

There’s no denying that changing government policies and fallout within the health insurance industry impact health care REITs, Probst notes. On the other hand, he says diversification within REIT portfolios and increased emphasis on private pay assets, such as senior housing, help make the property sector resilient.

In the current market environment, investing in health care REITs can be considered a flight to safety for many investors; a safe space anticipated to become more so as Americans age.

“When investors are concerned about global conflicts and an uncertain economy, particularly when it comes to fights over health care reform and tax reform, they rush into more defensive investments like health care REITs,” Martin says. “The health care REITs have done a decent job with their balance sheets, and they’re able to pay decent dividends.” 

 Whatever changes may be in store for the business of health care, health care REITs are ready to face them, according to Probst.

“The things that impact share prices tend to be macro issues, such as the expectation of interest rate hikes or tax policy changes,” Probst says. “But the demand for health care real estate is in place to offset any of those headwinds.”

(Why?)

Published at Thu, 21 Sep 2017 14:08:49 +0000

MIT’s Daron Acemoglu on Why Nations Fail

Scholars of history have long tried to answer a simple question: Why do some nations thrive, while so many others fail?

MIT economics professor Daron Acemoglu thinks he knows the answer. Acemogula and Harvard University’s James Robinson co-authored the book “Why Nations Fail: The Origins of Power, Prosperity and Poverty” in 2013. In it, they detailed the differences between “extractive” and “inclusive” institutions, which they argue hold the key to determining whether a society will flourish.

Acemoglu talked with REIT magazine about the origins of “Why Nations Fail”, the difficulties behind establishing a successful state and the inevitability—or lack thereof—of social decay.

REIT: In terms of process, did you come to your overall conclusions about the successes and failures of nation states by studying them individually, or did you do more of your research looking back at history through the lens of your theory?

Daron Acemoglu:  It’s a mixture of the two. James Robinson and I started with the hypothesis that institutional differences were at the root of the different economic trajectories of nations, and then turned to statistical analysis of historical data and case studies.

Of course, as we understood the history and the data better, our hypothesis got refined.

REIT: In your view, what are the keys to building – and maintaining – a thriving society or nation?

Acemoglu: We find that inclusive economic institutions, which provide broad-based opportunities and incentives for people to trade, invest and innovate, are the key building block of prosperity. They provide such incentives by ensuring secure property rights; a functioning legal system; regulation of monopoly power; and, most importantly, the creation of a level playing field in terms of access to opportunities and education.

But there is nothing natural about the emergence of inclusive economic institutions. When a narrow group of people in society are empowered and unchecked by institutions, they will instead try to build the opposite of inclusive institutions: extractive economic institutions, which create a tilted playing field in favor of themselves.

Therefore, the keys to building prosperity go through not just economic institutions, but political institutions that prevent any individual or group from becoming too powerful.

REIT: What does this mean for the economic paradigm of comparative advantage?

“The keys to building prosperity go through not just economic institutions, but political institutions that prevent any individual or group from becoming too powerful.” – Daron Acemoglu

Acemoglu: Comparative advantage is an important economic concept for understanding the allocation of talent within society and international trade between economies. But it is something that is determined by economic institutions. If extractive institutions create a tilted playing field, only a few people will have the opportunity (and thus the comparative advantage) to become an entrepreneur or an engineer or an innovator.

The key for creating prosperity is to spread these opportunities broadly.

REIT: If there are guidelines for creating durable, successful nations, why, in your view, do they historically have such a low probability of lasting?

Acemoglu: This is a key question, but its answer is simple. Extractive economic institutions, which do not generate sustained economic growth, still serve the interests of the politically and economically powerful. This is why they are the norm rather than the exception throughout history.

REIT: Your book seems to paint a picture of a thriving nation as something close to an accident or product of chance. Do you get that sense, that it’s all very capricious?

Acemoglu: Yes and no.

Extractive institutions have a compelling logic: Those who are powerful will often find extractive institutions more attractive for their benefits, and extractive institutions further enrich them and empower them to keep the system going. There is thus no natural process that will inexorably lead to the emergence of inclusive institutions.

But extractive institutions are not stable, either. They will generate conflict, and those who are losing out from such institutions will often articulate their demands for institutional change. This creates a possible pathway for inclusive institutions.

But as we have seen in the last decade, this is not an easy path. In the book, we talk of the “iron law of oligarchy”—trying to bring down extractive institutions often leads to the creation of another form of extractive institutions. We see this in action most recently in the Arab Spring, where the pro-democracy energy did not translate into a new, more democratic regime anywhere except in Tunisia. And today the situation in Egypt, for instance, is much worse than it was before. Not to mention Syria, which has plunged into one of the most destructive civil wars of the last several decades.

REIT: Culture gets downplayed in your model in favor of institutions. But aren’t the institutions within a society highly dependent on its culture?

Acemoglu: I would say that institutions strongly depend on social norms and political norms. But when people mention culture, they are often referring not to these norms, which are themselves shaped by institutions and could change relatively rapidly, but to national cultural characteristics or other “deep” cultural traits, for example related to religion or ethnic practices.

Though social norms are hugely important, we do not find much evidence in history that these national cultural characteristics are very important.

REIT: How easy is it for a successful nation to fall into disrepair? It would seem almost inevitable, wouldn’t it?

Acemoglu: Unfortunately, not that difficult. We have many examples in history of nations that build some degree of inclusivity only to collapse quickly. The Roman Republic or Venice are some of the most well-known examples. I worry that our country today can go the same way.

But I don’t think there is anything inevitable about this either. Our theory is not one of the inevitable rise and decline of nations, and I don’t think history supports such notions, either.

Once inclusive economic and political institutions are built, they have some amount of staying power, but they will often be challenged by those who wish to increase their power at the expense of the rest of society and have the means to do so. In our modern age, they can also be undermined by those who control information and the media. Our only defense is constant and unrelenting vigilance against threats to our democracy and inclusive institutions.

REIT: Do you see any practical applications of your theories on a more discrete scale than the nation state? For example, what can management teams of companies take away, if anything, from Why Nations Fail?

Acemoglu: The same logic applies to regions. Institutions and norms vary enormously across regions within countries.

Similar ideas also apply to firms, but with important differences. Firms are not autonomous political units, and thus other institutions, including courts and regulatory bodies, can restrict their power. And unless we have labor coercion—which is very common under extractive economic institutions, but fortunately not present in the United States and Western Europe today—workers can leave employers who are exploiting them.

Nevertheless, while some firms operate under fairly inclusive principles, others are much more in the mode of extractive institutions, meaning that they empower a small group of people who then benefit at the expense of the rest of the firm’s employees. Much more research is necessary to understand these dynamics in a more satisfactory manner.

Daron Acemoglu is a professor of economics at the Massachusetts Institute of Technology (MIT). In 2005, the American Economic Association awarded him with the John Bates Clark Medal, which recognizes an “American economist under the age of 40 who is judged to have made the most significant contribution to economic thought and knowledge.”

(Why?)

Published at Wed, 20 Sep 2017 14:42:17 +0000

REITs Rising in Asia

When it comes to the growth of REITs and publicly traded real estate companies in the Asia Pacific region, it’s all about the middle class.

The astounding growth rate of the middle class in developing nations will fuel demand for all classes of real estate, including office, housing, retail, industrial, data centers, infrastructure and hotels. Each year, 140 million citizens are joining the middle class annually, according to a 2017 report by the Brookings Institution. That amounts to roughly 384,000 people per day, the equivalent of adding the population of New York City to the world’s middle class in 22 days.

REITs can serve as tools to power growth and satiate the demand for new real estate in Asia’s emerging markets, says Peter Verwer, chief executive officer of the Asia Pacific Real Estate Association.

“The primary goal is to use REITs as efficient vehicles for nation building, while at the same time delivering wealth creation,” he says. 

From “Needs” to “Wants”

The economies with established REIT regimes in the region can serve as examples for the developing economies, Verwer notes. Japan and Australia are the biggest markets in terms of market capitalization; Hong Kong and Singapore also developed REIT regimes to securitize real estate and provide stable returns for investors.

The governments of the most populous Asian nations—China and India—are now working out appropriate REIT policies that meet the needs of sponsors and investors alike. Other developing nations, such as Malaysia, the Philippines and Vietnam, are facing their own hurdles as they develop individual REIT regimes.

These developing economies are contributing to solid growth in gross domestic product. For example, annual GDP growth of major Asia Pacific region economies—India excluded—is expected to reach 4.4 percent in 2017 and 4.5 percent next year, according to research by UBS Asset Management. Annualized growth for China is predicted to be 6.7 percent this year, according to the International Monetary Fund. For India’s fiscal year ended March 2018, it’s expected to be 7.2 percent.

This growth feeds the middle-class expansion, shifting consumer demand, says Shaowei Toh, a director of research and strategy for real estate and private markets in UBS Asset Management’s Asia Pacific region. “They used to need basic housing, now they want private housing,” he says. “History has shown us [that] when the middle class starts to expand strongly, there is a greater demand for fast-moving consumer goods.”

That means more growth for real estate such as warehouses, offices and housing. To meet the demand, sponsors will need all the financing they can get. 

“Developers need multiple sources of capital,” says Regina Lim, head of capital markets research for Southeast Asia for Jones Lang LaSalle Property Consultants in Singapore. “At the same time, with the growing wealth in the region, people need to put their savings somewhere, and the REIT provides [quality assets] which act as an inflation hedge.”

India on the Cusp

In terms of establishing REIT regimes, India is getting there. The Securities and Exchange Board of India (SEBI) allowed for the creation of REITs and infrastructure investment trusts (InvITs) in 2014. Two initial public offerings of InvITs were listed earlier this year on the National Stock Exchange: IRB InvIT Fund, which owns toll roads, debuted in May; India Grid Trust InvIT, which owns power transmission projects, listed in June.

Office and information-technology parks are expected to be the first REITs. Real estate owners such as DLF, Blackstone, Embassy Group, K Raheja Corp. and RMZ are all possible participants. For example, Embassy Office Parks, a joint venture of Embassy Group and Blackstone Group, filed last December with SEBI for approval to register its REIT. This year it has been working to select assets among its roughly 20 million-square-foot portfolio to put into the structure.

The delays in REIT listings are due in part to outstanding regulatory and tax issues, experts say. The slow progress is nothing new for nascent REIT regimes. Some, such as Singapore, have taken as long as a decade or more to get going.

In India, moving assets from one company to another takes time in terms of getting regulatory approval, says Rajeev Bairathi, executive director and head of capital markets at Knight Frank India’s Gurugram office, near New Delhi. While the federal government has clarified rules, real estate owners must also deal with the states, which have their own regulations and transfer taxes, referred to as “stamp duties.” Those taxes range from 4 percent to 8 percent depending on the state.

“That is a prohibitive cost,” Bairathi says. One possibility is that the government waive the stamp duty if a property is held for a period of years. Alternatively, states could issue a one-time waiver of transfers of assets to REITs.

In the meantime, there’s plenty of inventory that would qualify for securitization in India. About $43 billion to $54 billion of properties in the commercial markets would be investment opportunities for REITs, says Cushman & Wakefield.

In the office sector, there are 280 million square feet of space considered REIT-worthy among the top seven metropolitan areas in India, according to JLL.

“Occupiers increasingly prefer those landlords who are able to provide a full set of amenities and infrastructure to support the business and its employees,” says Mike Holland, chief executive of Embassy Office Parks. While Embassy wouldn’t comment on the status of its REIT formation, Bairathi noted that the first REIT IPO likely won’t come to market until 2018.

Until things get worked out for the first REIT listings, sponsors can take lessons from the InvIT IPOs, Bairathi adds. Both of the InvITs traded around a 6 percent to 7 percent discount to net asset value in mid-July, he noted, with the market deciding that the IPOs might have asked for too much. “In the perception of investors, it was a bit of aggressive pricing,” Bairathi says.

Infrastructure is also viewed as more organized and transparent than real estate, so the first REITs can follow their lead. “Transparency and disclosures will be extremely important in the first real estate” offerings, Bairathi says.  

China on Hold

China lags behind India’s progress in terms of laying the groundwork for REITs. It has yet to pass legislation that would set up a universal framework in terms of taxation and rules. In the meantime, regulatory authorities have encouraged the development of various market prototypes—often referred to quasi-REITs—to test different securitization formats. These quasi-REITs have generally taken the form of structured financings or asset-backed securities, rather than equity instruments.

“It’s a very rational and quite scientific public-policy process,” Verwer says. “The idea is to test out different models in different parts of the country for different asset types and learn from those processes before they start writing any black-letter law. The expectation is that this process will continue for a few more years.”

The government needs to concentrate on tax-related issues and make decisions on external versus internal management of REITs, Lim notes.

Low rental yields and lack of professional asset managers are also stumbling blocks, according to Lim. Meanwhile, China’s property development model allows for building projects to be sold to investors in pieces, which can complicate management of the properties.

Bottom line: It’s a waiting game in China. Meanwhile, demand for real estate will continue to build. Five hundred million people have moved to the cities in the last 20 years, with more urbanization to come.

“There is a lot more runway,” Verwer says. 

Developed Market Serves as Backstop 

Regardless of the timing for REITs in India and China, established REIT regimes now serve as a conduit for all investors in Asia.

Australia, which introduced its first REIT in 1971, offers a stable market, which hasn’t had a recession since the early 1990s. “You’ve got a very mature, transparent and very well-performing REIT market,” says Ken Morrison, chief executive of the Property Council of Australia.

The country continues to receive capital inflows from the United States, Europe,  Japan, Singapore and Hong Kong. Yet other ascendant countries, such as South Korea, China and Malaysia, are increasingly sending money Australia’s way. “We’re seeing a lot of capital looking to take an exposure to Australian property markets, and they are seeing the REIT sector as a way to do that,” Morrison says.

Many countries could also stand to gain by tweaking their legislation to give REITs a choice of structuring themselves via external or internal management. In the Asia Pacific region, only Australia, Japan and Hong Kong allow for the distinction, Verwer notes. That turns many investors off, who see external management as a conflict. “The only choice they have now is not to invest if they don’t like the model, whereas if there is the option for internal management, then they can use their influence to shape the market,” Verwer says.

That said, given Asia’s growing middle class, the demand for more real estate is not far behind. That will further the need for more tax-efficient and transparent REIT regimes.

Build them and they will come, Verwer says: “It’s very early days.” 

Regimes Debuting; Some Retooling  

A number of Asian countries either have plans to introduce REIT regimes, or they are in the process of upgrading them to attract more IPOs and investment. The hope of investors worldwide is for countries to adopt “state-of-the-art” regimes with world-class governance and disclosures.

“In terms of legislation, ideally it would allow the investment in the widest possible range of investment-producing asset classes,” says Peter Verwer of APREA. There also should be clarity of rules in relation to leverage and what are active and  passive income.

Countries that have passed legislation for REITs haven’t necessarily attracted investment because the laws don’t go far enough. For example, the 

Philippines passed legislation in 2009, but there hasn’t been a single IPO since then. One reason is a 12 percent tax for real estate owners who want to convert to REIT status. That’s hardly appealing, Verwer says.

“The Filipino sponsors and developers who built and own the assets—the big families—are obviously not going to give away the family silver,” he says.

Malaysia is working on a revision to its structure to be more in line with international standards, such as raising development limits and increasing corporate governance provisions. The country is also working to include guidelines for Sharia-compliant REITs, given that roughly 60 percent of the population practices Islam. The legislation is expected to be announced later this year.

Similarly, Vietnam has one REIT, but it is looking to mainstream its REIT model.

Abu Dhabi, the capital of the United Arab Emirates situated on the Persian Gulf, is expected to have an IPO for an exchange-traded REIT by the end of the year, most likely to be tourism and entertainment related, Verwer says. Currently, the city has four unlisted REIT-like companies.

Meanwhile, Sri Lanka is looking at redrafting legislation as part of its regime.

The hope is these countries follow the lead of successful REIT regimes by adopting similar frameworks, such as those seen in the United States, Japan and Australia, Verwer notes. He likens it to having an old smartphone and skipping over years of models to upgrade to the latest version.

“These countries with models that are less favorable to REIT creation and attracting investors can leapfrog over other regimes,” Verwer says.

(Why?)

Published at Tue, 19 Sep 2017 14:46:59 +0000

REITs Reshaping Communities: Duke Realty’s Legacy and Chesapeake Commerce Centers

In 2005, widespread changes in the automotive industry led the General Motors Company (GM) to undergo a complete overhaul, closing multiple plants, including its Linden Assembly Plant in New Jersey and Baltimore Assembly Plant in Maryland. Both factories had operated continuously since the 1930s and played important roles in the economies of the local communities.

While employment numbers at both plants had dwindled significantly from those at the height of domestic auto production in the 1960s, the closures put more than 1,500 people out of work in the Linden area and more than 2,000 in Baltimore — a huge hit to both communities. The decades of auto manufacturing had also created severe environmental damage to properties, making it a challenge for the municipalities and any potential buyer seeking to redevelop the sites.

“Once the auto manufacturing left, the facilities were found to be outdated and functionally obsolete. As a result, they were closed and had no use in their existing condition,” says Jim Connor, CEO of Duke Realty Corp.(NYSE: DRE), the Indianapolis-based REIT that purchased the former GM sites shortly after their closings.

“Both old General Motors plants were about 3 million square feet and they looked like typical auto assembly plants – a hodge-podge of buildings of different heights basically stuck together with smokestacks, power tanks and every other thing you can imagine. The sites were both an eyesore and a setback to the Baltimore and Linden areas because of the job losses.”

However, Duke Realty, with its long history of executing large-scale redevelopment projects, saw the opportunity to do more than just refurbish a couple of old auto plants.

Good to Know

• Chesapeake Commerce Center sits on 184 acres with approximately 2.3 million square feet of space in Baltimore.
• Legacy Commerce Center is a 1.1 million square foot, state-of-the-art industrial park on 60 acres in New Jersey.
• More than 7,000 employees work at the two sites combined.
• Tenants of Legacy Commerce Center include Blue Apron, Wayfair, and Unitex.
• The Chesapeake Commerce Center is adjacent to the Port of Baltimore.

Proximity to Ports, Untapped Potential

The location of the Linden, New Jersey site in a Tier 1 industrial location made its appeal from an investment standpoint clear.

“We thought it was a great infill site in the heart of New Jersey with great access to the New York metro area,” Connor says. “It was also fairly close to the Port of New York and New Jersey.”

The plan for Legacy Commerce Center: redevelop a billion-and-a-half square feet of industrial space to fill with good jobs, use New Jersey union labor for infrastructure improvements and create tax revenue that would benefit the municipality. The site included roughly 60 acres for industrial use with a small retail component, which is still awaiting development in a joint venture.

During the planning stages, Duke also developed a “strong working partnership” with the city officials in Linden. “There were different programs that were available to help spur development,” Connor says. “[The city] helped us through the entitlement process with a great attitude and approach.”

In the case of the Baltimore location, Duke had more space to work with, roughly 2.3 million square feet of untapped potential for its Chesapeake Commerce Center.

“What we liked about the Baltimore market was that there was a strong industrial demand in the greater Mid-Atlantic markets supporting that Baltimore-Washington Corridor, and we liked the proximity to the Port of Baltimore,” Connor says. The proximity less than a mile from the port presented “great potential for import and export activity: people that service the port, people that bring material into and out of the port.”

While the sale was private, the city offered some input in the process. “We were notified by General Motors that they would be issuing an RFP so while we couldn’t weigh in on it officially, we explained that we wanted it to stay an industrial-type property and that we didn’t want it to become residential,” explains Kim Clark, executive vice president of the Baltimore Development Corporation, with whom Duke communicated during the process. “GM was in complete agreement. It was amazing and surprising how smoothly that process actually went.”

The Baltimore site was also located in an Enterprise Zone and Focus Area. Both qualifications offer tax credits to encourage investment in distressed areas and aid businesses in reducing their real property, personal property and income tax bills.

“Our team had great long-term vision and a high degree of comfort that we could take on the demolition of the plant and the environmental alleviation to take it through its complete entitlement,” Connor says. The sites also presented opportunities for long-term jobs and short-term construction jobs for infrastructure improvements.

Environmental Alleviation

But before Duke Realty could realize this vision, it had to work with local municipalities to undertake the extensive environmental cleanup necessary at each site.

“In Linden, we met with the mayor, staff and different folks in the community to share our vision and it was met very positively,” Duke Realty’s Jeff Palmquist, senior vice president for the northeast region, says. “They helped us tremendously navigating and were a great partner because of environmental challenges and contaminants.” Duke also worked closely with the New Jersey Department of Environmental Protection. “They actually worked with the U.S. EPA and Duke to streamline the approval process and oversight.”

Duke opened the first of the three Class A buildings at Legacy Commerce Center in 2014 at 801 W. Linden Avenue, just minutes from the New Jersey Turnpike/I-95.

The plans for Chesapeake Commerce Center involved working with a much larger municipality in Baltimore. “The biggest challenge was the environmental condition, but Duke Realty did a great job with the cleanup and recycling materials from the old facility,” explains Clark.

Taking down the external buildings turned out to be the easy part. Discovering what was underneath the buildings proved more problematic. “When you think about a General Motors manufacturing plant, it had sections where the floors were three feet thick of concrete with pits that went down 20 feet that supported equipment, machinery, chemicals and oil,” Connor says.

After demolition, part of Duke’s recycling process included taking much of the existing paving – concrete and blacktop – and grinding it up on site to use in the new construction of the base, floors, and parking lots.

“When we set about to develop it, we committed to doing it as environmentally responsibly as we could,” says Connor. The vast majority of the building components were recyclable. “About 98 percent in Baltimore of the building materials, of the non-hazardous and non-environmentally contaminated materials, were recycled on site and used within the project. That’s 98,000 tons of materials recycled on the site that didn’t have to go into landfills.”

The first Chesapeake Commerce LEED-certified building opened in 2008. The industrial park also included 2,200 newly planted trees in addition to other landscaping.

Improving Infrastructure & Municipal Participation

There were also specific transportation concerns and accessibility issues at the Baltimore site. “We continue to have a lot of conversations about infrastructure and access because in the case of both of these parks, we have thousands of employees coming and going every day,” Connor says.

Legacy Commerce easily handled the parking requirements for its three buildings, but the Baltimore site required additional parking and meeting public transportation concerns. “It turned out, given the traffic patterns we had to put in some additional sidewalks and crosswalks for the employees who use public transportation. The city was great at working with the regional transportation department to put in more bus stops and work to help us meet the public safety requirements,” Connor says.

“Another challenge was the interstate system,” Clark says. “The city used some of its Highway User Revenue funds to redo a ramp off of I-95 to enable better, easier access to the site for large trucks and to completely redo Broening Highway.”

The roadway was in “deplorable condition” due to the heavy traffic it had seen over the years. “While there was no official partnership, we felt that the public participation was in Baltimore using its transportation dollars to redo the whole interstate roadway system to improve access,” Clark says.

“We had a good working relationship with the City of Baltimore. Cooperation between us, the city, and the tenants helped bring about best possible outcomes for our tenants and for the citizens,” Palmquist adds.

Embracing E-Commerce, Employment Gains

The combination of state-of-the-art distribution facilities and ideal locations made the process of finding new tenants relatively easy.

“We have a very good mix of tenants, all consumer product-based and servicing the population,” explains Palmquist. Linden is just over 20 miles from New York City. “A lot of tenants in this area are either e-commerce focused or servicing the 30 million-plus people in the population base of northern New Jersey and New York.”

The tenants include popular e-commerce companies like home goods seller Wayfair and ingredient-and-recipe meal kit service Blue Apron. Unitex, a leading medical textile rental service provider and Southern Wine and Spirits, a major alcohol distributor, along with local companies C&C Cola and Palace Imports also occupy Legacy Commerce. “The city of Linden has an employment assistance program for local residents, and we’ve had our tenants work with the city to hire local residents,” Palmquist says.

Baltimore’s Chesapeake Commerce Center made headlines in 2014 when it welcomed e-commerce giant Amazon to the park, along with a host of new employment opportunities. Duke had previously developed a strong working relationship with Amazon and had built several buildings for the company across the country. Amazon occupies two buildings totaling about 1.4 million square feet in Baltimore.

“Having Amazon onboard was everything we could have dreamed of happening on that site,” Clark says. “Duke was just terrific in making that happen. We now have a more modern industrial facility that’s employing a lot of the local community and it’s just been such a boon for the community.”

Chesapeake also features global plastic manufacturer Berry Plastics and the corporate headquarters for Johns Hopkins Home Care Group and Blueprint Robotics, a state-of-the-art computer-aided design and home fabrication company.

“We are strategically adjacent to the Seagirt Terminal in the Port of Baltimore, so it gives the tenants sought after access to the port,” Palmquist says. “Because there is an office space component of the warehouse facilities, there is a variety of jobs available including those in middle and upper management.”

Right Down Main Street

Fast-forward to today and Legacy Commerce Center is 100 percent leased. Chesapeake Commerce Center is roughly 100 percent leased, with one last site slated for development later this year. Compared to the 1,700 employees at the time of GM closing, Legacy now has more than 2,000 employees. With the boost from Amazon, Chesapeake numbers have doubled from the final GM days to more than 5,000 employees.

Investment-wise, both Legacy and Chesapeake Commerce Centers have performed well, according to Connor. They are also two projects consistent with Duke Realty’s overall strategy.

“We are an industrial bulk warehouse company with a long-term ownership perspective. These projects are right down main street for us,” Connor says. “When companies think about the difficulties of doing environmentally and socially responsible buildings, it can be done. These are two great success stories.”

(Why?)

Published at Tue, 19 Sep 2017 15:44:25 +0000

One-On-One With EdR CEO Randy Churchey

Gone are the days when going away to college meant sharing a communal bathroom in a boxy, brick tower. Today’s student housing – the preferred term over “dorms” – is far different: It includes a variety of formats and layouts tailored to today’s students, who have ample variety for new and updated housing both on and off campus.

An architect of this revolution is Randy Churchey, who took the helm as president and chief executive officer of EdR (NYSE: EDR) in January 2010. Recognizing the sector’s untapped potential, the Memphis-based company has worked closely with schools that want to replace outdated housing, but often face deep budget cuts and a desire to invest in academics.

The company now owns or manages more than 80 communities with upwards of 43,000 beds serving more than 50 universities in 25 states. From January 2010 until December 2016, EdR’s total shareholder return came in at 275 percent, according to financial filings, putting it in the REIT elite.

Up Close

Age: 57
Education: B.S. in accounting, University of Alabama
Family: Spouse, Debbie; three children, Zach, 27, Lindsay, 24 and Samantha, 19
Hobbies: Boating and golf
Favorite Vacation spot: Beaver Creek, Colorado
Recently Read: “Alexander Hamilton” by Ron Chernow
Favorite Sports Teams: Alabama Crimson Tide and New Orleans Saints

 Churchey, who in 2015 added chairman of the board to his title at EdR, talked with REIT about the evolution of the sector and what today’s parents and students want from student housing. He also broke out his crystal ball to predict the future of the sector. 

REIT: Tell me about your own housing situation as an undergrad.

Churchey: I lived in an on-campus fraternity house for three-and-a-half of my four years while at the University of Alabama. While the fraternity house was nice for its time, I was sharing a small room with a roommate, and there was a central shower/bathroom down the hall for everyone on the floor.

REIT:  How have upgraded housing options changed your business? 

Churchey: The modernization of housing has been the primary driver of external growth for our business.

Students’ tastes and needs for housing, as well as parents’ expectations, have evolved over the years. For previous generations of students, growing up sharing a bedroom with a sibling was common, so living in close quarters with a roommate didn’t feel foreign. Students today are raised with their own bedroom, bathroom and often a room devoted to their entertainment, so privacy is important. Modern on-campus accommodations reflect that change in culture. 

For off-campus, purpose-built student housing, they want pedestrian-to-campus living, so they are close to everything the campus has to offer, but with some independence. Our 82 communities spanning 52 universities allow these conveniences for students. 

Additionally, the wave of universities using public-private partnerships (known as “P3”) that began about 10 years ago has impacted our business significantly. Many universities determine the best way to revamp old and outdated housing is to engage a company in a P3 relationship to keep the project moving at a faster pace and also to use someone else’s financial resources.

In 2009, EdR was the first company to have an on-campus asset in a P3 environment, where we owned the asset, and that was at Syracuse University. The University of Texas, University of Kentucky and Cornell University have also opted to do a P3 development with us. These universities, some of which have very large endowments, are seeing the benefits of P3, and this model has been widely accepted by the university community. 

REIT:  What about the industry attracted you to student housing?

Churchey: I spent many years in the hotel business, and student housing is very similar in many ways. Both industries are grounded in hospitality and are all about pleasing our guests (and in our case, our students) every day.

I joined EdR in 2010 and was fascinated by the possibilities to modernize both on- and off-campus housing. This still excites me today. We’ve barely scratched the surface of student housing’s potential.

REIT:  Student housing is a bit like apartments, but you’re dealing with people who are still being shaped as adults. How does that affect your operations? Does it affect how you try to manage and cultivate EdR’s workforce?

Churchey: It is definitely a different viewpoint, and college is such a critical point in a young person’s life. That’s why we have community assistants (CAs) at our communities and programs to ensure our residents have a community of which to be a part. Our operations team trains our CAs on a variety of things to ensure our residents feel right at home and adjust to their independence. We operate our communities with the needs of college students in mind. 

From social functions and resident engagement to health and wellness initiatives, we care about our residents and want to ensure their time living with us is memorable. And we don’t just focus on the social aspect of being away at college. We strive to improve the well-being of our residents by creating a healthy living environment and promoting healthy habits that will impact them throughout their entire life. Through our “Live Here. Live Well.” program, our communities promote nutrition, fitness and mental strength, and offer opportunities to give back to the greater community. 

REIT: Your residents know they aren’t sticking around. 

Do they still cause a lot of wear and tear on housing? How do you handle maintenance and refurbishment costs when everyone moves in and out at the same time?

Churchey: Our residents actually tend to take pretty good care of our buildings and their units. Of course, it probably helps that we have many security cameras in the common areas and parental guarantees for damages. 

The most intensive time period in student housing is the annual move-out and move-in of students, or as we call it, “turn.” In a short two-week time frame, we have to restore each and every apartment to move-in acceptable condition. This turn period has just started at some of our communities and will continue for most of the month of August, depending on the respective university’s class start dates.

Our people – both on-property employees and home office employees alike – gear up for this a few months ahead of time and relish the huge challenge. It is a great team-building event that combines blood, sweat and tears with laughs and team bonding. It is all worth it when you see the excitement from our new residents, and in many instances their parents.

REIT: Student housing isn’t just on campus. How has social media and increased community activism changed how you work with surrounding communities? What kind of engagement do you have with local residents and officials in a place like Fort Collins, Colorado, or Columbia, Missouri?

Churchey: Social media has become the center of our resident engagement. We are way beyond taping notes on doors. Social media has become a primary avenue of communication and marketing. We are very involved with everyone from the university to the community and surrounding neighborhoods.

Our goal is to ensure we aren’t just a building in the neighborhood or community, but a permanent part of the university and its surrounding neighborhood. 

REIT: The deal to update the University of Kentucky’s housing stock was a transformative moment in student housing that has shaped how other campuses are approaching the business. How is it going and what have you learned? 

Churchey: In 2012, we were selected by the University of Kentucky to help them transform their campus by replacing all of their on-campus housing. We delivered new, state-of-the-art on-campus housing in 2013, 2014, 2015, 2016 and the final phase this year. In total, 6,850 beds.

The feedback from the thousands of students who have already lived in our housing has helped us constantly evolve and make the on-campus living experience better. For example, UK students loved our communal kitchens, so we added more of those spaces in later phases of the project. 

The impact at the University of Kentucky has been substantial – enrollment increases ahead of their peers, higher incoming student academic achievements and higher student retention, to name a few. By this project being financed by our ONE Plan [see sidebar below], the university was able to modernize housing, while preserving debt capacity for academic purposes with no adverse impact on their credit rating.

We currently own on-campus housing under the ONE Plan at Syracuse, University of Texas, Texas Christian University and Kentucky, and are currently developing at Cornell, Northern Michigan and Boise State. This method of financing new on-campus housing under the ONE Plan has achieved acceptance in higher education over the last few years, with more universities looking to the same model to update existing and outdated housing. 

REIT: Get out your crystal ball: Do you expect to see more public companies joining the student-housing sector anytime soon?

Churchey: I expect to see some additional public student housing companies within the foreseeable future. Our business is maturing and is readily accepted by the public markets.

REIT: Keeping with that crystal ball, describe the student housing that today’s toddlers will someday live in. What will remain and what will change?

Churchey: The key for the future will be technology and flexibility. Today, strong, reliable Wi-Fi is as important as water to our residents. When today’s toddler goes to college in 18 years, that need for technology and constant connectivity will only increase.

Flexibility of the spaces, both public and private, will also be something that will always reign in our communities. Whether it is public spaces, where students can study, socialize or work on group projects together, or exercise spaces that can be a yoga or fitness studio or on-demand exercise, flexibility to adapt to the next big thing in student housing is a key component of an EdR community. 

The One Solution

Educators know that higher-ed students want to live in modern space whilelearning in high-tech classrooms. The only problem is finding a way to pay for that in an era when budget cutting is routine.

Enter EdR’s ONE Plan, which takes care of the beds and frees up capital for schools to use at what they do best. Under the plan, EdR enters a ground lease — typically between 50 and 75 years — funds and develops or upgrades the housing, and then operates and maintains it. The schools get the benefit of income from a well-known REIT with minimal work. What’s more, EdR itself assumes equity and debt responsibility, so the closely watched debt capacities of the schools are unaffected.

“The ONE Plan is a financing option that allows universities to update and modernize their housing stock while still preserving their capital for other projects on campus,” says EdR President Tom Trubiana. “The ONE Plan aligns the interests of the university and our company, while offering the university a single trusted partner for all steps of the development and management process.”

The list of ONE Plan communities includes Syracuse University, the University of Texas, the University of Connecticut and the University of Kentucky. 

(Why?)

Published at Tue, 19 Sep 2017 13:30:50 +0000

REIT Magazine Reader Survey

I have always been somewhat skeptical when I hear anyone tout the results of a new survey as definitive proof of some universal truth. Maybe I am just jaded, but I always want to know who was surveyed, by whom and what was their agenda.

I mean, if nine out of every 10 dentists really thought one toothpaste was significantly better than all other brands, we wouldn’t need an entire toothpaste aisle at every grocery store.

As we all learned last election cycle, opinion surveys or polls can be even more misleading. Pollsters often either do a poor job sampling, ask the wrong questions or are misled by respondents.

I say all that so you realize that when I discuss the results of our biennial REIT magazine reader survey, I have made sure they pass the sniff test. We surveyed 1,000 actual readers of the publication with a range of job functions and perspectives on the industry.

If you were one of those individuals who participated in the survey, thank you. The print and online survey featured 25 questions about the content, design, usefulness and overall quality of the magazine. I am pleased to report that the feedback we received was very positive and confirmed that our readers find value in the publication. Some of the noteworthy results:

• The typical respondent reads each issue of the magazine, and nearly half of the respondents pass the magazine on to at least one colleague.
• Along with the Wall Street Journal and Bloomberg, REIT magazine is among the top three sources for news on real estate investment—NAREIT’s website, REIT.com, ranked fourth.
• Industry transactions, legislative issues and company profiles ranked as the most popular content.
• Nearly 75 percent of all respondents took some sort of action, such as sending an email inquiry or visiting a company website, after seeing something in the magazine.

When asked for any improvements they would make to the magazine, several readers said they would like to see the content get more in-depth. That is not surprising considering the average survey respondent has spent more than 13 years in some aspect of the real estate industry. Roughly a quarter of them had more than 20 years of experience. 

This feedback is very important to help us continue to refine the magazine, and all of NAREIT’s media offerings, to communicate the REIT and real estate investment story more effectively.  In fact, you can expect to see many of those changes in the next issue. Stay tuned…

(Why?)

Published at Tue, 19 Sep 2017 13:35:41 +0000

4 Quick Questions with Dominique Moerenhout, CEO of European Public Real Estate Association

What impact is the political uncertainty across Europe having on the listed real estate market?

The political uncertainties in Europe have retreated substantially since the recent election of Emmanuel Macron as the new president of France, but a major question mark remains over the timing and outcome of the elections in Italy.

The European listed real estate sector has not been affected by this environment any more than what we have seen with the traditional equities market. However, companies in the United Kingdom have seen some local challenges related to Brexit.

What are some of the main challenges and opportunities in terms of expanding the REIT regime in Europe?

Our biggest focus for expansion is currently centered around two countries, namely Poland and Sweden.

EPRA is actively involved in Poland, where REIT legislation is under development. We are talking here about… the sixth-largest economy in Europe, so this is definitely a market to watch closely. A second draft REIT bill was recently proposed, and we might expect a REIT regime there in 2018.

Sweden is less advanced in the process, but has the fourth-largest listed real estate sector in Europe. So, naturally, we are working with the national associations and property companies to educate and advocate on the benefits of adopting the REIT regime in their country.

What steps is EPRA taking to attract generalist investors?

Last year’s designation of listed real estate as a separate equity sector within [the Global Industry Classification Standard] represented a very positive milestone in the way generalist investors perceive our industry.

We are conscious that it may take some time for those investors to increase their asset allocation to listed real estate, but even small shifts in sentiment can go a long way. That’s one of the key reasons why EPRA’s outreach program focuses on insurance companies, pension funds, private banks, family offices and their respective local associations. This is really the top priority today for EPRA in Europe.

How about other priorities?

Our main priority at present is the reduction of the capital requirements under the European Solvency II regulations. The EU decision-makers adopted these regulations some years ago, requiring insurers to weight “riskier” investment asset classes more heavily in the capital levels. Listed real estate is categorized with the general equities asset class under the rules and, therefore, attracts heavier capital requirements.  Our objective is to reduce (the capital requirements) to the level of direct property investments.

We have to convince the EU regulators that investing in the listed real estate sector is not riskier than investing directly in bricks and mortar. Today, we see a window of opportunity because of an ongoing review of the rules. This could have a massive impact on the total market capitalization in Europe – it could even double in size.

I also want to continue the fantastic work that EPRA has been doing over the last several years on the financial Best Practices Recommendations (BPR) and address investors’ growing interest in environmental, social and governance matters. We hope to bring the sustainability BPR up to the same level of adoption as the financial ones.

Dominique Moerenhout became EPRA’s new CEO in March, succeeding Philip Charls. Moerenhout previously served as CEO for Luxembourg and Belgium at BNP Paribas Real Estate Investment Management.

(Why?)

Published at Tue, 19 Sep 2017 13:50:35 +0000

The Durability of the REIT Approach to Real Estate Investment

As my term as 2017 NAREIT Chair draws to a close, I’m finding that my experiences in the past year have done nothing but reinforce my confidence in the durability of the REIT approach to real estate investment.

That starts with the quality of the management teams across the industry. We see their acumen on display every day through their leadership of best-in-class real estate companies. My role as Chair has given me an even greater appreciation for the thoughtful insight these executives bring to broader conversations about financial markets, public policy and more.

Our dynamic and increasingly global economy rewards wisdom, foresight and prudent leadership at the head of any company in any industry. Fortunately, those qualities don’t come in short supply among NAREIT’s members.

My admiration doesn’t end at the C-suite, though. The depth of talent executing on the visions laid out by these management teams plays a vital role in ensuring the success of REITs as they support how people around the world live, work and play.

The capabilities of the people who make up our industry have undoubtedly contributed to REITs’ track record of solid financial returns to investors. They’ve also played a part in the growing recognition of REITs and real estate as a fundamental element of diversified investment portfolios. We saw tangible evidence of this in 2016 with the elevation of real estate to its own sector under the Global Industry Classification Standard (GICS) by S&P Dow Jones Indices and MSCI.

This year brought more gratifying developments in the investment community. Importantly, investment firm Vanguard, the largest REIT investor in the world, is seeking shareholder approval to change the benchmark for its REIT index funds, meaning that the funds would invest in a broader range of REITs and publicly traded real estate companies. More REITs are joining the ranks of major stock market indexes such as the S&P 500 as well.

Since REITs were introduced in the United States nearly 60 years ago, NAREIT has been instrumental in preserving, perfecting and promoting the REIT approach to real estate investment. NAREIT represents REITs in the policymaking process on all levels, but it also helps tell our story to investors, financial analysts, the media and the broader public. As the global economy evolves, NAREIT provides instructive analysis and insight as to where REITs have been and where they are headed. It also creates the spaces for collaboration and thought leadership among its members that are necessary to address key issues facing REITs and real estate investment.

I’m deeply grateful for the opportunity I’ve had to serve the REIT community as 2017 NAREIT Chair and would like to thank CEO Steve Wechsler and the NAREIT staff for all of their hard work in the last year. Moreover, I want to express my gratitude to NAREIT’s members as a whole for all of their support. Working together through NAREIT helps ensure that REITs will remain vibrant and effective building blocks of the economy for years to come.

I look forward to seeing all of you in Dallas at REITWorld 2017.

Tim Naughton
Chairman & CEO
AvalonBay Communities, Inc.

(Why?)

Published at Mon, 18 Sep 2017 17:15:07 +0000