Archive | US reits

Published 12 April 2006

Concern is growing in the US about the short-term prospects for the reit sector as the Federal Reserve raises interest rates and the sector’s reporting season is about to start.

The 10-year Treasury yield made it to 4.99% this month, putting the reit sector’s 4.1% dividend yield in the shade.

Although the likelihood of this position has been apparent for some time, the MSCI US reit index has still risen 33% this year.

In an article in the latest National Real Estate Investor magazine, Parke Chapman quotes analysts picking a decline of perhaps 10-15% in reit share prices this year. One says cap rates could weaken by 25-50 points, resulting in a 10-15% fall in asset backing, bringing share prices down by the same proportion.

Most US reits are stuck in their own backyard: they invest at home and that’s that. There’s been a certain amount of rationalisation – usually with indications that it’s a positive step, not that it’s brought on by necessity – and there will no doubt be a lot more.

Some US reits have invested outside the US borders, but major US investment in foreign property has increasingly become the field for wholesale funds. Difficulties for US investors back home may constrain their influence elsewhere. Meanwhile, foreign investment in the US has been strong – several Macquarie Bank funds have bought large portfolios, led by Macquarie ProLogis & Macquarie CountryWide.

Australian institutions have also bought heavily in New Zealand, taking cap rates to new benchmarks and causing a rerating through the whole commercial property sector. The question here is: How much firmer can cap rates get? The questions in the US, though, are: Have the overseas buyers been overvaluing their US purchases as that market heads into a deep trough? Or have they bought well, in a market which will exit a trough quickly?

Website: National Real Estate Investor: Reversal of reit fortunes?

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Attribution: National Real Estate Investor, own observations & files, story written by Bob Dey for this website.

Published: 4 August 2005

CalPers (the California Public Employees’ Retirement System) returned 12.7% for the June 2005 year, its 2nd straight double-digit annual gain since the mid-90s, and the top performer in the portfolio was real estate.

The huge pension fund said real estate earned it a return of almost 38%, more than double the NCREIF 15.5% benchmark. 6% of the total portfolio is in real estate. During the year, the pension fund added $US23.5 billion, including $US2.5 billion generated by its investment staff’s taking advantage of unique market opportunities, taking total market value to a record $US189.8 billion.

Chief investment officer Mark Anson said the fund exceeded industry benchmarks in 3 out of 5 major asset classes. Its alternative investment management programme, which specialises in private equity & venture capital holdings, generated a 22.8% return compared to the 14.2% benchmark, and its investments in corporate governance funds that target ailing public companies returned 20.8%.

International stocks earned 17.3% compared to the 16.9% benchmark, and domestic stocks returned 7.5%, one point short of the benchmark.

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Published: 7 July 2005

Nearly half of the institutional respondents in a survey on listed US reits said the trusts weren’t forthcoming with enough information to value certain income streams, such as those from joint ventures or partnerships, compared to other business sectors.

Even so, 90% of the buy-side analysts & portfolio managers surveyed by Broadgate Consultants LLC said they’d increase or maintain their investments in publicly traded reits (real estate investment trusts) over the next 18 months.

Survey respondents included some of the largest pension & mutual funds in the US.

31% said the level of information they got on underlying assets wasn’t enough to develop an accurate valuation, and only half thought reit chief executives & their boards “really understand their investor base and what drives their share valuation”.

The concerns are badly timed for the sector, because only 10% of respondents thought reit shares were undervalued, while nearly 60% saw opportunity in direct participation in real estate investment through alternatives such as private equity firms & hedge funds.

Broadgate chief executive Thomas Franco said: “The good news is that there appears to be plenty of demand for reit company shares among sophisticated institutional buyers. However, institutional investors will be looking much more carefully at individual reits, their management teams, strategy, strengths & weaknesses. Those management teams that understand their investors & what is important to them are likely to win the most support, assuming the performance factors are equal.”

He added: “The expected growth of hedge fund & private equity investment in the sector would seem to indicate that there continue to be market inefficiencies to exploit, which explains, in part, the strong institutional appetite for reit shares.”

Comment: The surprise is that it’s taken these analysts that long to work out that they don’t get told too many useable numbers. The biggest reit, Equity Office Properties, gives a great amount of comparative detail, including yields & rental movements, and the big mall companies provide considerable comparative material, but the industry is otherwise notable for the absence of key value indicators. Transaction statements almost invariably focus on total price, not on performance.

What’s more worrying is that the Broadgate chief should say, after collating the concerns, that sophisticated institutional investors were still keen to throw their money at a sector they can’t value properly – and that that’s good news.

I expected US reits to start falling over about 3 years ago as the sector moved into a downward cycle, but a government & treasury keen to maintain cashflow at the expense of the balance sheet (consumer spending versus rising national debt) have maintained economic euphoria. Nevertheless, there have been some signs of rationalisation through large portfolio transactions, a subtler acknowledgement of easing which seems not to have been widely recognised.

Website: Broadgate

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Published: 2 March 2005

The Wells Real Estate Investment Trust Inc, a public non-traded reit, has entered into an agreement to sell 27 office & industrial properties, which it owns either wholly or jointly, to Lexington Corporate Properties Trust, a New York-based reit, for $US786 million.

Wells acquired or developed the properties between 1999-2003. Most are A grade office buildings with single tenants. Wells Real Estate Funds president Leo Wells III said the properties had increased in value and their sale was an exercise in effective portfolio management.

For Lexington, it was a rare opportunity coming at a time of favourable financing. Lexington is borrowing $US558.3 million (71% gearing) on non-recourse first-mortgage loans

To finance the acquisition, Lexington has arranged to obtain $558.3 million of non-recourse first mortgage loans secured over these & 5 more properties, from JPMorgan Chase Bank, most of it at 5.2%.

Web sites: LexingtonWells Real Estate Funds

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The gap between the Wilshire US real estate investment trust (reit) index & the Russell 2000 small-cap index closed entirely this month, with both down about 5% from the start of April, Torto Wheaton Research chief economist Jon Southard said in the CB Richard Ellis research organisation’s weekly report last Friday.

The reit market corrected severely in early April after a strong US employment report, with 15% lopped off share prices in 2 weeks while the rest of the market was unchanged. Mr Southard said this played directly into the hands of those who believed a bubble had developed in the commercial real estate market.

The reit market recovered slightly faster than the rest of the market in June.

Mr Southard said that, “while we are certain that rising interest rates do negatively affect the value of commercial real estate assets, it is in no way a certainty that real estate assets are any more at risk than any other competing asset.”

Websites: Torto Wheaton Research

Wilshire indexes

Russell US indexes