Real Estate Investment Trusts

Data Center REIT CyrusOne Investing $100 Million in Chinese Company GDS

CyrusOne Inc. (NASDAQ: CONE) said Oct. 18 that it will make a $100 million equity investment in GDS Holdings Ltd. (NASDAQ: GDS) as part of a new strategic partnership with the Chinese data center developer and operator.

Following the equity investment, CyrusOne will own approximately 8 percent of GDS. Additionally, CyrusOne President and CEO Gary Wojtaszek will join the GDS board.

In a conference call, Wojtaszek noted that CyrusOne and GDS count almost every major online cloud company in the United States and China as their customers. He stressed that the partnership fulfills the companies’ goal of developing a global data presence and creates a “compelling value proposition” for shareholders. He added that “practically all” of CyrusOne’s customers are looking to expand in China.

The strategic partnership is expected to involve the exchange of best practices around sales and marketing, data center design and construction, supply chain management, and customer relationship management and operations.

Wojtaszek said the partnership and investment with GDS will do nothing to disrupt existing plans to expand in the European market. In fact, he pointed out that GDS’s major shareholder, STT GDC, already has a strong presence in Europe. As a result, CyrusOne will now have two partners that can help it expand in Europe at a faster pace than would have been possible alone, he said.

Michael Rollins, analyst at Citi Research, said he had considered European expansion to be the priority for CyrusOne. However, “the partnership with GDS strengthens CyrusOne’s move towards becoming the key supplier and enabler of the hyper-scale cloud players both in the U.S. and abroad,” he observed.

KeyBanc Capital Markets analyst Jordan Sadler described the announcement as a “surprising strategic shift,” given that during the second quarter earnings call Wojtaszek said the company was reviewing a number of options in Europe, including a property in Dublin.

“We view the investment and the Chinese market as a potentially significant opportunity, though the risk associated with an investment in GDS remains less clear,” Sadler said.

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Published at Wed, 18 Oct 2017 18:22:35 +0000

BDO Consultant Says Industrial Repurposing an Alternative for Surplus Retail Real Estate

In the latest edition of The REIT Report: NAREIT’s Weekly Podcast, Dennis Duffy, director with BDO Consulting, discussed potential conversions of retail real estate into industrial properties.

The rise of e-commerce and spike in retail store closings in the United States have generated speculation about the future of country’s retail property inventory. REITs generally own high-quality properties, which means their portfolios are less exposed to pressures from online retail. Additionally, many REITs are adapting their properties to the changing tastes and preferences of consumers.

However, some retail property owners are considering transitioning their assets into industrial properties, according to Duffy. He noted that demand for industrial space does not appear likely to come down in the near future.

“Population growth continues in the U.S. Demand for consumer goods continues in the U.S.,” Duffy said. “Inadequate existing infrastructure also will create demand for logistics.”

Duffy also pointed out that delivery companies will need logistics facilities that are closer to their client base. Industrial space “has always been on the edge fo town,” according to Duffy.

“From the standpoint of logistics… I expect that any of the retail properties that are surplus or about to be repurposed would probably occur in high-demand areas or those best-suited to deal with the existing infrastructure,” Duffy said.

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Published at Tue, 17 Oct 2017 17:30:00 +0000

Survey Finds Executives Still Bullish on Real Estate Market

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, John Sullivan, chairman of DLA Piper’s real estate practice, discussed the results of the firm’s annual survey of real estate executives.

Sullivan said the survey showed that real estate company executives remain “generally bullish” on the commercial real estate market. The level of optimism has dropped slightly from a year earlier, according to the survey.

Regarding the ongoing transitions in retail real estate, Sullivan said the executives had a relatively positive outlook for the sector. He pointed out that more than two-thirds of survey respondents expressed confidence in the ability of retailers to adapt to changing market conditions brought on by online retail.

“There’s a lot of focus on different ways of looking at retail now,” Sullivan said, “not just as a matter of going to the mall and getting a new pair of sneakers, but creating an entire experience.”

Looking at the capital markets, Sullivan said executives are predicting that the interest of foreign investors in U.S. real estate will remain high. In addition to China, Sullivan said investors from Canada, Germany, Norway and South Korea are expected to be among the major sources of capital for U.S. real estate.

In terms of areas of concern, DLA Piper’s survey identified the slowing of the Chinese economy as one potential problem.

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Published at Wed, 11 Oct 2017 14:52:20 +0000

REIT Fundamentals Remain Favorable, Despite September Downturn

REIT fundamentals remain favorable despite weakness in the sector’s stock performance during September, according to Brad Case, NAREIT senior vice president for research and industry information.

The total returns of the FTSE NAREIT All REITs Index dropped 0.6 percent in September, while the S&P 500 posted a total return of 2.1 percent. For the first nine months of 2017, total returns of the FTSE NAREIT All REITs Index gained 6.7 percent. The S&P 500 returned 14.2 percent through the end of September.

Case described September as a month of “mean reversion.” He explained that the strongest stock performers in September had been the weakest before that point, namely lodging and self-storage REITs. The weaker performers in September had been the strongest beforehand: infrastructure, data center and manufactured home REITs.

For the larger market as a whole, Case noted, 2017 has been a year of large disparities in performance: Large cap growth stocks have outperformed, whereas small cap value stocks have languished. Case explained that REIT market performance has traditionally been more similar to that of small cap value stocks compared to other parts of the broader stock market. During 2017, REITs moved ahead of small cap value stocks, although that gap did start to close in September, he noted.

Case also observed that REITs have been undervalued for most of 2017. “That part of the performance disparity did not close significantly during September,” he said.

Meanwhile, overall fundamentals remain healthy, according to Case. He pointed to slow but steady macroeconomic improvement and improvement in the demand conditions that tend to result in higher rent growth and occupancy levels. At the same time, supply is only increasing modestly.

“Conditions are really quite favorable for real estate investing and specifically for REITs,” Case said.

Turning to specific property sectors, Case pointed out that retail REITs began to recover in September. Retail REITs bucked the overall trend to post total returns of 0.7 percent in the month.

“The impact of e-commerce is likely to be more severely felt outside of the REIT space than in, and I think investors are starting to realize that,” Case said.

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Published at Thu, 05 Oct 2017 19:59:35 +0000

Study Finds REIT Board Governance Practices Strong; More Diversity Needed

REITs outperform other publicly traded companies in key facets of board governance and best practices, according to a new report, although there is room for improvement in the industry in terms of board diversity.

The report released by Ferguson Partners, Ltd., a global professional services firm, and Board Governance Research, an independent research company, compared 151 REITs included in the Russell 3000 Index to 2,979 other companies in the index.

The report found that 87 percent of REITs included in the study require board directors to stand for election annually, far ahead of the broader market rate of 58 percent. In general, investors are in favor of annual director elections because they prefer the opportunity to vote on each director every year, the report noted.

At the same time, 64 percent of REITs separate out the roles of CEO and board chairman, compared with 58 percent of the other Russell 3000 companies, the report found. The study pointed out that many governance experts advise companies to separate the roles of CEO and board chair upon the next CEO succession.

On the other hand, REIT boards would benefit from increasing their diversity of gender, age and background, according to the report.

The study showed that the other Russell 3000 companies’ boards are more likely to have two or more female directors. Moreover, according to the data, 14 percent of Russell 3000 boards had three or more female directors, compared with 6 percent of REITs.  Fifty-two percent of REITs included in the study had only one female director, compared with 36 percent for the non-REITs surveyed.

REITs’ directors are also more likely to be older when compared against board directors outside the industry, according to the research. One quarter of REIT directors are 70 or older, while only 19 percent of the directors of Russell 3000 companies are in this age range.

Furthermore, the study found that REIT directors are slightly less likely to be under 50 years old. Only 8 percent of REIT directors are under the age of 50, compared with 10 percent of the Russell 3000 directors.

Annalisa Barrett, founder and CEO of Board Governance Research, highlighted the need for REITs to recruit directors outside of their industry. Currently, more than 52 percent of REIT directors are actively employed by a real estate company or a REIT, the study found.

“More forward-thinking boards are now recruiting directors outside of the real estate industry to obtain more diverse views, bring fresh ideas to the table and to avoid possible conflicts of interest issues,” Barrett said.

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Published at Wed, 04 Oct 2017 12:51:25 +0000

FTSE NAREIT All REITs Index Down 0.6% in September

REITs moved modestly lower in September as broad concerns about the economy, the direction of interest rates and the length of the current real estate cycle combined to keep the sector in a holding pattern, observers said.

The total returns of the FTSE NAREIT All REITs Index dropped 0.6 percent in September, while the S&P 500 posted a total return of 2.1 percent. For the first nine months of 2017, total returns of the FTSE NAREIT All REITs Index gained 6.7 percent, while the S&P 500 returned 14.2 percent.

Total returns of the FTSE/NAREIT All Equity REITs Index lost 0.8 percent in September and 6.0 percent through the first nine months of the year. The total returns of the FTSE NAREIT Mortgage REIT Index rose 1.5 percent in September and 20 percent for the year to Sept. 29.

The yield on the 10-year Treasury note rose 0.2 percent in September. Through Sept. 29, the yield was down 0.1 percent for the year.

Alexander Goldfarb, a senior REIT analyst at Sandler O’Neill & Partners, noted that despite factors weighing on the REIT sector, underlying fundamentals have not changed during the course of this year. “Overall, the fundaments are fine,” Goldfarb noted.

David Rodgers, senior analyst at Baird, agreed: “Real estate is a little bit status quo right now.”

“Real estate is seven, eight years into the recovery, if not more. Now it’s positioning for whatever that next phase of the economy is — be it inflation or slower growth,” Rodgers said.

Looking ahead to REITs’ third quarter earnings reports, Goldfarb said some of the stories to watch include the impact of severe weather events on REITs active in Puerto Rico and Houston, as well as potential development delays in the multifamily sector related to labor shortages and permitting problems.

Turning to the performance of property sectors during September, retail REITs bucked the overall trend to post total returns of 0.7 percent in the month. Self-storage REIT returns gained 5.6 percent last month, while office REIT returns were 1.8 percent higher. Returns for lodging REITs were 4.7 percent higher.

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Published at Mon, 02 Oct 2017 19:02:58 +0000

Green Street Analyst Says Single-Family Residential REITs Maturing

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, analyst John Pawlowski of Green Street Advisors offered his take on the maturation of the single-family residential REITs.

The size and quality of the single-family residential sector have “improved dramatically” from when it first started to emerge earlier this decade, according to Pawlowski.

Pawloski said the sector’s operating fundamentals currently compare favorably with the apartment segment of the residential market. The single-family residential REITs are enjoying the benefits of refined operating processes and doing a better job of cutting costs, according to Pawloski. He added the while the apartment market has experienced an influx of new supply in recent years, additional supply has been “fairly restrained” in the single-family segment.

Pawlowski did note that valuations for single-family residential REITs “are becoming a little pricier… But they’re still very reasonable give the favorable near-term operating outlook.” Single-family residential REITs and apartment REITs still have “fairly compelling valuations versus some property types,” he said.

Regarding recent subpoenas issued by the Securities and Exchange Commission (SEC) to companies in the single-family rental sector, Pawlowski said the securities watchdog is investigating a third-party provider of broker price opinions used for single-family rental securitizations. “We’re seeing this as more noise than any meaningful impact on REITs,” he said.

In terms of factors for potential investors in single-family residential REITs to consider, Pawlowski pointed to capital expenses. “Nobody knows how these homes are going to age over time,” he said. Investors will also have their eyes on the REITs’ capital allocation skills.

“Their capital allocation skills will need to be proven over time in good and bad times,” Pawloski said.

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Published at Mon, 02 Oct 2017 17:59:22 +0000

REITs Aiding Recovery, Assessing Damage in Puerto Rico

More than one week after Hurricane Maria swept across the island, Puerto Rico remains without electricity. Meanwhile, roads are impassable due to extensive flooding, and essential supplies are running low.

For REITs that operate in the storm-devastated territory, the process of contacting employees, providing assistance and assessing damage is only just starting.

Shopping center REIT DDR Corp. (NYSE: DDR) has 12 properties in Puerto Rico. DDR CEO David Lukes said the company continues to work to provide basic supplies to its local team and their families. DDR has also made steady progress assessing damage and is preparing repair plans.

“We expect full recovery to span a significant period of time given damage to Puerto Rico’s critical infrastructure and the current difficulty procuring building materials and making necessary repairs,” Lukes said.

Plaza Palma Real, DDR’s property on the southeastern portion of the island, sustained major damage, the company said.  While the company’s remaining 11 assets sustained less significant damage, DDR noted that it remains unclear when re-openings could occur.

American Tower Corp. (NYSE: AMT) reported that of the sites it has been able to gain access to and inspect, it appears that the structural integrity of the towers has held. However, a substantial amount of the carrier customer equipment on the towers and at the sites is badly damaged. This damage to carrier equipment and the loss of electrical power has resulted in very few cell sites being operational, the company said.

American Tower has resources on the ground now who are helping with recovery efforts, performing full site audits on its 118 towers and identifying priority projects. The company is working with the Federal Communications Commission, Federal Emergency Management Agency and the Department of Homeland Security on a coordinated response.

Retail REIT Kimco Realty Corp. (NYSE: KIM) is busy ensuring its employees are safe and providing them with necessary assistance, according to Jennifer Maisch, director of corporate communications. As for damage assessment, infrastructure challenges are preventing a complete review of its seven shopping centers at this time, she said.

Maisch said Kimco is encouraging employees throughout the company to donate to the Red Cross through the International Council of Shopping Center’s (ICSC) portal. Kimco is matching employee donations up to a total of $50,000. The ICSC Foundation, the charitable arm of ICSC, said it will match the first $500,000 contributed by ICSC members to the American Red Cross’ hurricane relief efforts.

Mall REIT Taubman Centers, Inc. (NYSE: TCO) had a seven-person security team on site at its only property in Puerto Rico, The Mall of San Juan, during the hurricane. That lessened the impact to certain areas of the center, the company said.

Taubman said it continues to work with tenants to fully understand the extent of the damage.

“With nearly all of the island’s power out and Puerto Rico’s residents highly disrupted, it is very hard to tell when we will have the full resources and manpower needed to complete the task,” said Ryan Hurren, director of investor relations at Taubman.

Meanwhile, tower REIT Crown Castle International Corp. (NYSE: CCI) has 262 cell towers located in Puerto Rico and is still in the process of conducting inspections.

“So far, we have found that our towers maintained their structural integrity and continue to provide the infrastructure required to host our wireless carrier customers,” Crown Castle said.

Crown Castle noted that it is clearing debris so that wireless carriers can gain access to their equipment to make repairs as needed and restore network service for customers.  The company is also working to bring in additional resources, equipment, water and fuel to help support the needs of the community.

Business storage REIT Iron Mountain Inc. (NYSE: IRM) said its facilities will be closed and all service in Puerto Rico will be suspended until further notice.

“Widespread destruction caused by Hurricane Maria is hampering our efforts to quickly assess our facilities as there are limited options for communicating with our employees and recovery partners,” Iron Mountain said. The REIT said it is preparing to secure its facilities and begin remediation as soon as possible.

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Published at Fri, 29 Sep 2017 17:46:38 +0000

Multifamily REIT UDR CEO Takes On Urban Development Challenges

Tom Toomey, president and CEO of multifamily REIT UDR, Inc. (NYSE: UDR), is the first CEO of a public firm to serve as global chairman of the Urban Land Institute (ULI). His two-year term began in June. In an interview with REIT.com, Toomey spoke about the forces shaping real estate project development today, the impact of severe weather events and prospects for the multifamily sector.

REIT.com: What do you see as some of the key factors impacting development today?

Thomas Toomey: I tend to think of four things that are influencing development challenges today: demographics and population shifts, new economic growth engines, technology and sustainable development.

The United States is going through one of the most tremendous demographic shifts that we will witness in our lives. At 80 million [people], the millennials are extraordinarily strong and are entering the housing and employment markets in large numbers. At the same time, the baby boomers at 75 million-plus are downsizing and retiring or contemplating retirement.

On the economic front, we’re moving into something that’s very unique. Two big drivers are the knowledge economy and the sharing economy. Both are dramatically changing our cities and our daily lives. It won’t be long before we have a significant amount of artificial intelligence and robotics that are offshoots of both of these new economies.

It’s an exciting time. Innovation and challenges breed opportunity.

REIT.com: Is the real estate industry adequately prepared for severe weather events like those we’ve seen recently?

Toomey: Recent weather events are changing dramatically the real estate industry and the lives of the people who live in those cities. The “storm of the century” is happening more frequently and with greater severity – we have to get used to that.

But what I see is that businesses and cities are also adjusting. The ability to bring infrastructure back on line today is extraordinary. You’re seeing the built environment being improved, along with better planning by cities to prevent the loss of life and ensure that businesses are up and running quickly.  That’s going to drive a lot of our behavior going forward. It really takes a partnership between the builders, cities and government.

REIT.com: What impact could these weather events have on future development?

Toomey: Capital may move to safer places, and migration patterns may change. That being said, New Orleans, for example, has built a thriving community off of a smaller population base. What I am amazed at is our ability to go back to cities like New Orleans or New York and rebuild the impacted areas better than they were before.

At UDR, we were significantly impacted by Hurricane Sandy. We moved all our co-generating electrical equipment out of basements and first floors basically to 100 feet in the air. As an industry, we adjust and come back stronger every time.

REIT.com: How would you describe fundamentals in the multifamily business?

Toomey: We’ve enjoyed a great run, now almost stretching a decade. With the change in demographics, we have seen new supply, but what’s unique about it is that the U.S. economy is still averaging 180,000 jobs a month. It’s still in balance. We’ve lost a little bit of pricing power, but I think supply is abating and it’s just a matter of time before we get back to a higher growth rate than where we are today.

The product we are building today in the multifamily space is extraordinarily better than we’ve ever built before and appeals to a broader range [of people]. The economics of homeownership or renting have remained pretty much in favor of the renter pool. Supply and demand, demographics and growth of the economy continue to be in our favor over the long term.

REIT.com: Do you foresee any changes to UDR’s development pipeline?

Toomey: We’re very sensitive to our cost of capital to ensure we’re creating long-term value for our shareholders. As we’re facing short-term supply challenges, development gets harder. Construction costs have risen dramatically. The wind at our back for pricing opportunities has slowed a little bit, so development is harder to pencil today.

I would see us staying pretty level in our development activity, but changing the market mix and the price point of our products to be more sensitive to the current environment.

REIT.com: And what about the future of UDR’s Developer Capital Program, which invests in alternative development structures, including participating loans and preferred equity investments?

Toomey: I’m comfortable that the program will continue for probably another three to five years, given the current dynamics of the markets.

When we started the program in 2013, we saw that the financial markets were pulling back in terms of loan proceeds for new development activity. It became apparent that there was an opportunity to invest with some of the best developers in the country and retain an option to purchase the asset or participate in the value creation at a later date. We’ve been able to reap significant rewards by participating in some of the risk.

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Published at Tue, 26 Sep 2017 16:37:11 +0000

U.S. REITs Outperform in 2017 GRESB Assessment

Participating U.S. listed REITs outperformed their global peers overall in environmental, social and governance (ESG) performance in 2017, according to the latest edition of the Global Real Estate Sustainability Benchmark (GRESB) Real Estate Assessment.

The GRESB Real Estate Assessment provides an investor-centric ESG benchmark and reporting framework for listed real estate companies, property funds, real estate developers and private real estate investors. Participating U.S. listed REITs earned an average score of 67, putting them ahead of the global GRESB average of 63.

Listed REITs accounted for 42 of the 204 North American companies and funds reporting on their ESG performance in 2017, according to GRESB. The average GRESB score for the North American region as a whole stood at 64.

Dan Winters, head of the Americas for GRESB, said the U.S. REIT industry made “tremendous strides” in 2017. He noted that U.S. REITs recorded their fifth straight year of improved GRESB scores. Winters also pointed out that the five-year carbon dioxide reductions of participating REITs exceeded sustainable development goals set forward by the United Nations.

“This year’s GRESB results offer credible evidence [participating REITs] will continue to set the tone for the industry,” Winters said.

NAREIT Vice President for ESG Issues Fulya Kocak highlighted the growing number of U.S. REITs participating in the GRESB survey, as well as their recognition for strong performance. “At NAREIT, we believe that benchmarking ESG performance results helps to identify opportunities for environmental, social and financial gains,” she said.

GRESB noted that the 2017 results showcase a drive by North American participants with more than five years of benchmarking experience to increase the availability of ESG data, with 90 percent or more of companies having data management systems in place to monitor energy and water consumption. Winters pointed out that in 2012, less than 25 percent of U.S. REITs were comprehensively tracking consumption data.

Globally, a record 850 property companies and real estate funds completed the 2017 GRESB assessment. In total, they represent 77,000 assets with a value exceeding $3.7 trillion combined.

“We hope that the commitment and meaningful actions taken by the 850 GRESB participants serve as an example to others and help to drive improved sustainability performance more broadly across the market,” said Sander Paul van Tongeren, co-founder and managing director at GRESB.

NAREIT’s Leader in the Light Awards, which are announced in November, use GRESB data as part of the selection process.

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Published at Mon, 25 Sep 2017 14:25:07 +0000