Real Estate Investment Trusts

RLJ Lodging Trust to Buy FelCor for Approximately $1.2 Billion

RLJ Lodging Trust (NYSE: RLJ) said April 24 that it has agreed to buy FelCor Lodging Trust Inc. (NYSE: FCH) in an all-stock transaction that values FelCor at approximately $1.2 billion.

The merger is expected to create the third-largest public lodging REIT. RLJ said the transaction will create a combined company with a pro-forma market capitalization of about $4.2 billion and a total enterprise value of $7 billion. The merged company will have ownership interests in 160 hotels.

Under the terms of the agreement, each share of FelCor common stock will be converted into 0.362 shares of newly issued RLJ common stock. FelCor shares closed on April 21 at $7.37, while RLJ shares closed the same day at $23.80.

Under the terms of the deal, FelCor will become a wholly owned subsidiary of RLJ. RLJ shareholders will own 71 percent of the combined company, with FelCor shareholders owning the remaining 29 percent. The deal is expected to close in the fourth quarter.

During a conference call, Ross Bierkan, RLJ president and CEO, said merging with FelCor was not a recent idea.

“We’ve discussed this often internally over the past five years, with the view that the majority of its portfolio fits very well with our long-term strategy,” Bierkan said. 

Steven Goldman, who became FelCor CEO in February, pointed out that the timing of the deal makes sense strategically.

“The lodging industry is mature, cyclical and we are in a challenging period in the cycle to grow. Scale matters, and it was unclear to me whether FelCor could effectively compete over the long term at its current size and with its current cost of capital,” he said.

Goldman said the combined company will be a “formidable competitor” in the lodging REIT sector.

Competition from Ashford Hospitality

RLJ is not the first REIT to pursue a merger with FelCor. Earlier this year, Ashford Hospitality Trust, Inc. (NYSE: AHT) launched a hostile bid to acquire the company.

Michael Bellisario, analyst at Robert W. Baird & Co., said that while it is possible that Ashford Trust increases its bid for FelCor, “all else equal, we believe FelCor’s board prefers the combination with RLJ.” He pointed out that the pro forma company will have lower leverage than under a merger with Ashford Hospitality and will be internally advised.

Ryan Meliker, an analyst at Canaccord Genuity Inc., said he was surprised by the merger announcement. He noted that RLJ has historically invested in select-service and focused full-service properties, whereas FelCor’s portfolio has gradually moved away from those assets in recent years.

“While the deal appears to be accretive to funds from operation (FFO), increased scale seems to be the driver of the deal more than anything else,” Meliker said.

According to William Crow, an analyst at Raymond James, benefits of the deal include added brand and market diversification. In particular, he said the deal would increase RLJ’s exposure to Hilton’s Embassy Suites chain.

“We like that the transaction gets RLJ shares back on investors’ radar screens (and) is a good start towards much needed industry consolidation,” Crow said.

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Published at Mon, 24 Apr 2017 17:35:22 +0000

State Tax Expert Says REITs Should Monitor Local Impact of Tax Reform

Scott Smith, national practice team leader for state and local tax at BDO, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Smith urged REITs to continue to monitor the potential impact on state taxes resulting from comprehensive tax reform and try to plan accordingly. He also noted that states are taking a wait-and-see approach to federal legislation effective in 2018 that will change procedures for how the Internal Revenue Service conducts partnership audits.

In addition, Smith commented on market-based sourcing, which relates to how states will source gross receipts received for the performance of services. Market-based sourcing rules are significant for an Equity REIT’s taxable subsidiary, Smith said. He noted that market sourcing attempts to source receipts to where a customer is located, as opposed to where the service is performed.

Smith stressed that the rules can vary on a state-by-state basis. REITs can end up in a situation where they are sourcing receipts to more than one state, he said.

Mortgage REITs face similar issues in terms of sourcing rules varying state-by-state, Smith said.

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Published at Mon, 24 Apr 2017 16:02:33 +0000

Kilroy Realty Executive Says Education Key to Effective Cybersecurity

Michelle Ngo, senior vice president and treasurer at Kilroy Realty Corp. (NYSE: KRC), joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Ngo commented on cybersecurity matters and noted that Kilroy is “seeing the gamut” of issues, including fraudulent internal emails asking employees to wire funds to specific bank accounts.

“Education and awareness is certainly the key to combatting all these schemes and plans,” Ngo said.

Ngo also said Kilroy is evaluating several treasury systems, following a migration to a new accounting system a few years ago. She noted that the new accounting system has helped reduce the use of Excel spreadsheets and manual calculations.

Meanwhile, Ngo said cash flow reporting is a big focus of the treasury workstation platform. The company is keen to house all of its cash flow data within one system, she said.

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Published at Mon, 24 Apr 2017 14:06:47 +0000

SEC Proposals Remain Under Discussion, Lawyer Says

Carrie Ratliff, a partner at King & Spalding LLP, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Ratliff participated in a REITWise panel on Securities and Exchange Commission (SEC) legal issues.

Ratliff commented on the SEC’s proposed rule that will require companies to disclose a ratio comparing the CEO’s pay with the median workforce. She noted that the issue has generated considerable anxiety, as it will allow all employees to compare their salaries to the median figure.

Ratliff also discussed the uncertainty surrounding SEC proposals on executive clawbacks, noting that many companies already have clawback policies in place. “At this point, you just wait and see what the final rules look like and then adjust from there,” she said.

Ratliff added that her clients are not feeling the need to adopt the rule that was proposed by the SEC given that there’s so much “still up in the air.”

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Published at Fri, 21 Apr 2017 15:29:28 +0000

REITs Adapting to Changes in Retailing

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Calvin Schnure, NAREIT’s senior vice president for research and economic analysis, discussed the health of the retail REIT sector.

Schnure stressed that changes in shopping habits as a result of the growth of e-commerce have affected some types of properties more than others. Notably, older shopping centers and malls are most vulnerable to the shifts, especially those in areas with lower job growth in the last decade. On the other hand, many newer developments in higher-income locales with better job growth “are doing well,” according to Schnure. He emphasized that REITs primarily own these newer properties in more upscale markets.

“REITs have always occupied the upper portion of the quality spectrum, so this is a place where they’ve been well positioned from the very beginning,” Schnure said.

In terms of how REITs are adjusting to the changes in the retail environment, Schnure said REITs haven’t had much trouble replacing departed tenants. In fact, they’re looking for more productive tenants to fill the empty spaces. These include tenants that can enhance the “experience” of going to a mall or shopping center, providing services such as new dining options, movie theaters and fitness clubs.

Retail REITs are also continuing to invest in improvements to their properties, according to Schnure. “It’s a lot more enjoyable to walk into a mall or shopping center if it has nice finishings and interesting stores and reasonable traffic flow,” he noted.

Schnure offered evidence that retail REITs’ strategies for addressing the shifts in consumer spending are working. Funds from operations for retail REITs were up more than 6 percent in 2016 over 2015. Retail REITs paid $9.4 billion in dividends in 2016, an increase of nearly 8 percent over 2015. Furthermore, their occupancy rate has held steady near a record high of 96 percent.

(Subscribe to the NAREIT Podcast via iTunes.)

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Published at Fri, 21 Apr 2017 17:56:01 +0000

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.

(Why?)

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.

(Why?)

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.

(Why?)

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