Real Estate Investment Trusts

Audit Specialist Says Companies Debating Use of Non-GAAP Measures

Catherine Ide, senior director of professional practice at the Center for Audit Quality (CAQ), joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

CAQ was established in 2007 with a mission to enhance investor confidence and public trust in the capital markets.

Ide noted that regulators have been focused on information that companies provide outside of the financial statements filed with the Securities and Exchange Commission. At the same time, companies are having internal debates about what information they can provide to investors that is relevant, reliable and timely, she said.

Ide stressed that when used appropriately, non- Generally Accepted Accounting Principles (GAAP) financial information provides useful insights about companies. She noted that CAQ released a publication in December 2016 calling for a conversation among the financial reporting supply chain regarding the preparation, presentation and use of these measures.

“We believe the auditing profession is uniquely positioned to foster this dialog because we have a lens into many facets of those stakeholders in this process,” Ide said.

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Published at Thu, 20 Apr 2017 17:49:28 +0000

REIT Executives See Growth Moderating in 2017

REIT executives in the residential, retail and lodging sectors say new supply and changes in consumer habits are likely to result in more moderate growth in 2017 compared with recent years.

C-suite executives from AvalonBay Communities Inc. (NYSE: AVB), Federal Realty Investment Trust (NYSE: FTR) and Host Hotels & Resorts Inc. (NYSE: HST) offered their thoughts on the direction of their companies’ sectors in an April 19 Real Estate Lenders Association panel held in Washington, D.C. The roundtable was moderated by Calvin Schnure, NAREIT senior vice president for research and economic analysis.

Supply and Demand Returning to Balance in Apartments

Matt Birenbaum, CIO of AvalonBay, described the past decade as a “phenomenal” period for the apartment industry. Supply is now catching up with demand, he said, especially in urban markets.

Birenbaum said that after three to four years of outsized rent growth in the “high-single digits,” AvalonBay is projecting the rate will decline to closer to mid-single digits.

“Tipping Point” in Retail

In retail real estate, Federal Realty CFO and Treasurer Dan Guglielmone said it is likely that 2016 and 2017 will be regarded in years to come as a “tipping point” for the retail industry.

However, Guglielmone expects that Federal Realty’s portfolio of mixed-use developments in dense, walkable urban environments will continue to be attractive as shopping patterns evolve.

Federal Realty typically posts growth in funds from operations (FFO) of around 7 percent, Guglielmone said, but that will dip to the range of 3 percent to 5 percent in 2017. The company’s FFO growth should return to a range of about 6 percent to 7 percent by 2019 or 2020, according to Guglielmone.

Business Traveler Not Back to Full Strength

Meanwhile, Jay Johnson, senior vice president and treasurer of Host Hotels, commented that business travel has not returned to “full strength” since the end of the financial crisis. Although Host is back to peak occupancy levels, that hasn’t translated into higher rates, he noted.

Johnson highlighted the challenges faced by the New York lodging market from new supply. While Host has experienced negative growth in New York for the last 18 months, the company remains positive for the city on a long-term basis. Expectations are that some hotel supply will undergo a conversion to residential use, he added.

For 2017, Host is forecasting that revenue per available room (RevPAR) growth could be up to 2 percent. In 2016, RevPAR growth was 2.7 percent.

Potential for Rising Rates

Turning to the potential impact of additional interest rate increases, the REIT executives were quick to point out that rates still remain at historically attractive levels.

Johnson observed that rising interest rates should be beneficial for the lodging business because they will serve as proof of increased economic activity. “Rising interest rates won’t impact [Host Hotels’] capital structure,” he said.

Birenbaum added that at some point, rising interest rates will impact asset values. That could trigger a buying opportunity for AvalonBay, he said.

“In some of our markets, asset values are well-above long-term trends,” he noted.

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Published at Thu, 20 Apr 2017 18:37:42 +0000

Green Street Analyst Says Class-A Malls Attractively Priced

Cedrik Lachance, director of U.S. REIT research at Green Street Advisors, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Lachance discussed the overall direction of real estate values. He explained that Green Street compares private market real estate values with two different indicators. The first indicator looks at total real estate returns in comparison with corporate bonds, he said.

“When we make that comparison, we say that real estate is a little bit on the cheap side,” Lachance said.

Green Street also compares private market values against REIT prices.

“From that standpoint, REITs trade at a discount to net asset value (NAV). While the public market isn’t always right, directionally, it’s an interesting indicator,” Lachance said.

Blending the two indicators suggests that private real estate market values are probably going to be about flat for the next six to 12 months, according to Lachance.

Meanwhile, Lachance said there are four segments of the REIT market that are attractively priced at this this time: manufactured homes, storage, apartments and malls.

“The mall business clearly is in a period where it has to reinvent itself,” Lachance said. He noted that the mall business is represented in the public market by class-A malls, which are likely to have the strongest performance in the long term.

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Published at Fri, 21 Apr 2017 12:41:21 +0000

REIT Insurance Experts Reflect on Risk Management

Michael Chu, vice president and national practice leader for REITs at Arch Insurance Group, and Howard Sider, underwriting manager at Arch Insurance, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Chu noted that 2016 was a record year for securities class action litigation, which rose 44 percent mostly due to mergers and acquisitions (M&A) claims. With regard to REITs, M&A cases continue to be filed, but for the most part they have stayed in state court, especially Maryland, he added.

Maryland and other jurisdictions, for the most part, have not followed Delaware’s lead in rejecting disclosure-only settlements, so plaintiffs see no need to change venue, according to Chu.

Chu also pointed out that the six non-M&A class action cases against publicly traded Equity REITs in 2016 marks the highest number in any year since the financial crisis.

Meanwhile, Sider commented on the increased activity that REITs have experienced in the area of derivative demand letters.  More recently, these letters have been primarily focused on executive compensation and typically settle with a substantial plaintiff fee award, he noted.

Sider said there has also been an uptick in regulatory investigations of REITs, primarily focused on accounting irregularities or improprieties, disclosure issues and use of non-GAAP metrics. Since 2013, there has been a 130 percent increase in Securities and Exchange Commission actions against REITs, and about a quarter of those were focused on reporting and disclosure matters, according to Sider.

Sider added that all of these actions are resulting in increased scrutiny of companies by the media, shareholders and analysts, which can lead to subsequent litigation.

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Published at Thu, 20 Apr 2017 12:37:56 +0000

Favorable Supply Picture Boosts Manufactured Housing REITs

Manufactured housing REITs occupy an enviable place in the real estate market today as they continue to benefit from a dearth of new supply and healthy demand for affordable housing options, analysts say.

According to Ryan Burke, an analyst at Green Street Advisors, approximately 10 new manufactured home communities have been built in the United States in the past two decades – “an eye-popping anomaly among real estate sectors.” He notes that aging baby boomers are driving demand at age-restricted communities, while all-age communities are popular with younger families looking for affordable housing options.

“Nowhere else in real estate do we see this complete lack of new supply and the favorable demand dynamics,” Burke says. “It’s a pretty good story.”

Drew Babin, an analyst with R.W. Baird, says manufactured housing REITs and existing owners of manufactured housing communities currently have a “chokehold on the market.”

The favorable supply-demand dynamics have not been lost on investors. In 2016, manufactured housing REITs posted a total return of 28.5 percent, compared with total returns of 18.2 percent for apartment REITs and 12.8 percent for single-family homes during the same period. The FTSE/NAREIT All REIT Index’s total return last year was 9.3 percent.

“As [manufactured housing] continues to outperform other sectors, particularly in the private market at the property level, there’s no way the outperformance will go unnoticed,” Burke says.

Among the barriers to entering the manufactured housing market are the communities’ long lease-up periods. It can take more than five years to reach a stabilized occupancy level, Burke notes. “It’s tough for a developer to be able to underwrite that lease-up period,” he adds.

Acquisitions Likely to be “Episodic”

Manufactured housing REITs generally own assets on the higher end of the quality spectrum in the market. According to Green Street, manufactured housing REITs own about 1 percent of the estimated 50,000 manufactured housing communities in the U.S., but nearly 15 percent of the institutional-quality stock.

With new supply non-existent, REITs will look to enlarge their portfolios through acquisitions as well as by expanding existing sites, analysts say. In 2016, Sun Communities, Inc. (NYSE: SUI) paid $1.7 billion to acquire a portfolio of interests in more than 100 manufactured housing and recreational vehicle (RV) communities owned by Carefree Communities Inc.

While there may be a couple of high-quality manufactured housing portfolios of comparable size to Carefree still available in the market, analysts mainly expect to see smaller deals going forward on the scale of one to two assets.

“There are a few larger, institutional-quality portfolios out there, but my view is that it will be more episodic,” says Nick Joseph, an analyst at Citi Research.

Burke points out that most of the manufactured housing parks are held by smaller investors that own up to three properties. He said they hesitate to sell for several reasons:  they make a good living from the properties; they would be hit with high taxes if they sold; and many sellers would be unsure how to reinvest the proceeds to achieve similar yields.

“There’s a whole lot of demand for these properties across the board from REITs and institutional investors and very few properties coming to market relative to other property types,” Burke adds.

Indeed, the appeal of the manufactured housing sector has not been lost on international investors, according to Joseph. Singapore global wealth fund GIC took a stake in an owner of U.S. manufactured housing communities in 2016.

Strong Internal Growth Profile

Analysts agree that manufactured housing REITs enjoy a sound internal growth profile that includes the ability to increase density at existing sites where they own adjacent land.

“They’ve been very aggressive about doing that because it’s so hard to find entitled land,” Babin says. “Oftentimes the best land is on their existing properties.”

At the same time, REITs will continue to push through rent increases to existing tenants. Babin notes that annual increases have been around the 3 percent range.

“It’s tough to drive rents beyond that. Tenants stay for a long time and you don’t want to get too aggressive,” he adds.

Meanwhile, REIT portfolios also include RV parks – a segment that offers the REITs more flexibility to pass on rent increases when new amenities are added, according to Babin.

RV parks comprise about 25 percent of manufactured housing REITs’ revenue, a number that has increased dramatically in the last 10 years, according to Burke. “REITs have used RV parks as another avenue of growth,” he says.

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Published at Thu, 20 Apr 2017 13:09:55 +0000

Fundamental Thesis of REITs Should Continue Under Tax Reform, Sullivan & Worcester Partner Says

Ameek Ponda, tax partner at Sullivan & Worcester LLP, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Ponda described 2016 as a “momentous year” in terms of REIT taxation developments.

Passage of the PATH Act at the end of 2015 brought in some “very helpful legislative changes,” including expanded opportunities for foreign investors in U.S. REITs, he said.

The PATH Act also produced tighter rules for REIT spinoffs and taxable REIT subsidiaries (TRS) ownership, Ponda noted. The past year also saw the Internal Revenue Service (IRS) finalize their rules on what it means to be real property. “There were no surprises there,” Ponda said. The rules became effective for 2017 and add “a great deal of clarity and structure,” he added.

Ponda stressed that REITs do have to pay close attention to tax reform. Most people believe that the fundamental thesis of REITs – in which retail investors participate in professional real estate management and ownership – should remain under tax reform.

“The idea of letting the little guy invest in REITs, that continues,” Ponda said.

Ponda added that once the House of Representatives’ tax reform blueprint provides more detail on how non-REIT public companies and real estate partnerships are going to be treated, it will become more apparent how REITs will fare.

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Published at Wed, 19 Apr 2017 19:57:30 +0000

Robotic Automation Impacting Real Estate Industry, Consultant Says

Josh Herrenkohl, principal and global real estate advisory leader at EY, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Herrenkohl discussed technology trends that could impact the real estate industry. One is robotic process automation, which Herrenkohl said has the opportunity to reduce lesser-value activity greatly within companies. Robotic process automation software allows employees to focus on more value-added functions, he noted.

Herrenkohl also commented on two dynamics impacting digital disruption. One is non-traditional companies entering the real estate industry, such as Airbnb. The other is the use of industry-agnostic technologies, such as analytics technologies, he said.

Companies are taking a number of steps to prepare for digital disruption, including hiring chief innovation officers to stay ahead of trends, Herrenkohl said. In addition, companies are making bigger investments into technology, emphasizing innovative strategic thinking and leveraging analytics to make more effective decisions, he noted.

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Published at Tue, 18 Apr 2017 14:53:45 +0000

Global Medical REIT Building Portfolio of Medical Facilities

When Global Medical REIT Inc. (NYSE: GMRE) went public last summer, the company set its sights on a specific niche within the health care real estate sector: licensed medical treatment facilities. The company has focused on transactions in the range of $10 million to $50 million, and CEO David Young now sees a steady flow of acquisition opportunities coming from smaller cities and rural locations.

“The universe of opportunity seems to be in that layer,” Young said in an interview with REIT.com.

Bethesda, Maryland-based Global Medical REIT focuses on medical practices that deliver core medical procedures, such as cardiovascular treatment, cosmetic plastic surgery, eye surgery, gastroenterology, oncology treatment and orthopedics.

According to Young, the advanced technology and design of its assets improves clinical outcomes for patients while also providing a more convenient setting than a traditional hospital. These benefits lead to higher-value real estate and a stable tenant base, he added.

Young noted that Global Medical REIT opted to pursue an asset class and operator class that was “underserved,” rather than more crowded markets such as senior housing, assisted living facilities and medical offices. Larger health care REITs invest in specialized medical treatment facilities, but Global Medical REIT is the only pure-play REIT in the niche segment.

Sourcing Domestic and International Capital

Another aspect that sets the company apart – and the reason for its name – is its strategy of sourcing capital domestically and internationally, according to Young. “There are no other REITs in our space that are sourcing capital internationally. I think that does give us a competitive edge,” he noted.

Global Medical REIT was established in 2014 when Hong Kong based ZH International Holdings, Ltd.  provided the first tranche of private equity. Global Medical REIT spent 18 months using private equity and bank leverage to build a portfolio worth about $110 million.

In 2016, the company raised $150 million through an initial public offering (IPO). Later, it also secured a $200 million syndicated bank line of credit and an accordion feature for an additional $50 million. Young said these steps gave Global Medical REIT the necessary funds to aggressively pursue its strategy.

At the end of 2016, Global Medical REIT had acquired $219 million of assets. It purchased approximately $108  million of assets in the first quarter of 2017. “We are on track in terms of our volume,” Young said.

Targeting Facilities Frequented by Older Patients

A projected aging of the U.S. population and changing consumer preferences are major factors in the company’s property selection.  Global Medical REIT targets medical practices used more frequently by older patients, noting that the 65-plus age cohort is expected to double between 2015 and 2060.

At the same time, Global Medical REIT sees a need for more outpatient facilities, citing data showing that outpatient visits grew 50 percent in the two decades leading up to 2013.

When it comes to sourcing acquisitions, Young said his background in the health care industry reduces the need for broker intermediaries.  He previously served as a hospital CEO and as an executive at Hospital Corporation of America.   

Young also prefers to originate deals because it allows the company to control and add value to the lease structure. Global Medical REIT seeks properties with triple-net leases with 10- to 20-year initial lease terms.  Tenant physician salaries and medical practice profit distributions are subordinated to payment of the lease, Young noted, which adds to the stability of the income stream.

Meanwhile, although federal health care reform appears to have been set aside for now, Young said he does not expect any potential future changes to impact the company’s business model.

“Our tenants have such excellent cash flow coverage on the leases so we expect that they can easily weather revenue reductions without impacting the fixed cost of rent on a facility. We expect them to be able to comfortably cover their rent to us under almost any scenario,” he said.

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Published at Tue, 18 Apr 2017 15:41:57 +0000

Colony Northstar Executive Sees PNLR Changes Attracting Investors

Frank Saracino, CFO for retail companies at Colony NorthStar, Inc. (NYSE: CLNS), joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Saracino participated in a REITWise panel that discussed changes in the public non-listed REIT (PNLR) market. He noted that private equity firm Blackstone’s entry into the PNLR segment has turned the focus in the market toward advisory asset management fees.

Saracino noted that the past year has been marked by fee compression, both in terms of what broker-dealers are getting paid and what sponsors are able to earn. Originally, fees as high as 2 percent of total assets were common. Now, fees are down to 1 percent of average assets, according to Saracino.

Transparency has also improved, Saracino said, with funds now giving quarterly, monthly or daily data on net asset values (NAV).

Saracino noted that the range of changes in the PNLR segment “will help drive investors back to the space and force the sponsors to step up and continue to deliver.  For us, that’s a good place to be.”

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Published at Tue, 18 Apr 2017 15:50:02 +0000

Banker Sees Expectations of Rate Hike “Baked Into” REIT Stock Prices

Scott Eisen, head of North American real estate at Citi, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Eisen moderated a REITWise panel on the state of the capital markets. Eisen noted that expectations of rising interest rates have already been “baked into” REIT stock prices.

He also commented on REITs trading at sizeable discounts to net asset value (NAV). Office REITs, apartment REITs, shopping center REITs and mall REITs trade at discounts to NAV of up to 30 percent, according to Eisen.

“Those are some meaningful discounts,” he said.

Eisen said he sees a “push-pull” between well-capitalized private markets and public market investors that seem to believe that either prices or NAVs have to decline.

“Either way, the expectation in the market is that prices could be going down from here,” Eisen said.

Meanwhile, Eisen said he has seen no real evidence of any regulatory impact on lending for commercial real estate. Banks are continuing to grow REIT lines of credit, and the commercial mortgage-backed securities (CMBS) market is “about as healthy as we’ve seen it in a very long time,” he pointed out.

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Published at Mon, 17 Apr 2017 20:15:51 +0000