by Gary H. London
There are three San Diego-based REITs eyeing the real estate market here and abroad. There are also many REITs that are located elsewhere but invest in San Diego. Many of the more than 200 listed REITs do business in San Diego.
While they control big money — their total investments are greater than $5.5 billion — with the exception of the many extra zeroes that make up their portfolios, they still have to gauge the market the same as everyone else.
What they are mostly doing right now is buying. First, they started by cleaning up their portfolios. This included selling off assets as best they could as the market changed; then, they concentrated on stabilizing the assets they kept — meaning they tried to maximize occupancies of the mostly commercial and investment grade properties they held. They kept them in good shape or even invested money in making them better. Then, the REITs sold what they could.
A Good Example
It’s a primer on what should be done. One of the local success stories is Excel Trust, with headquarters in Rancho Bernardo and stewarded by Gary Sabin. Excel, which had a stock offering in 2010, has raised enough money to begin a buying spree. Money wasn’t ever the problem, anyway. What Excel wanted to do was time the market such that it could pick up good assets at reasonable prices, using its buying power to get good deals.
It is now investing in the future. It is optimistically assuming there is a brighter future, something that is not exactly being spoken out loud as the nation remains in a somber mood and economic struggles continue on many levels.
What is even more amazing about Excel is that it is primarily a retail investor. This is pretty gutsy, given the amazing transformation that the retail sector is experiencing, what with the Internet competing with bricks-and-mortar retail for consumers, the old and aging retail inventory, the oversupply of that inventory and the downsizing of stores. It’s a big hurdle to find “green shoots” in the retail sector.
The way Excel is accomplishing this is by using their considerable buying power and management expertise to both pick out good assets and to maintain or increase their value.
It’s a strategy that American Assets Trust, another large REIT player (with more than $1 billion in market capitalization according to Bloomberg) under the sage and prescient leadership of Ernest Rady, also professes. American Assets owns commercial properties consisting of both retail and offices in many markets, including San Diego. Its management team, like Excel’s, is based here and it owns properties here.
BioMed Realty Trust Inc. is a so-called life-science REIT. Unlike the other guys who specialize in the commercial and retail sectors, BioMed is a real estate player in the pharma sector, with assets here and in other biotech hotbeds, including Boston. The San Diego Business Journal reported in May that BioMed recorded $105.5 million in revenue for its first quarter ending March 31, having risen almost 14 percent from the previous year, setting a company record. Its secret? Good leases, which create strong revenues over a well positioned and diversified (by geography) portfolio.
REITs have been around for more than 50 years in the U.S. They were essentially created to provide access for investors through securities to real estate assets. An investor owns stock in a REIT just as they own stock in a corporation. At least 90 percent of REIT taxable income has to be returned annually to the investors in the form of dividends, and 75 percent of the assets have to be strictly in real estate.
The REIT market serves as a double barometer. It tells us about market cycles and strategies. The way it does this is because the REIT links the investor and the asset. Because investors must regularly be paid, REIT management must have an ear to the ground, being quick to respond. This direct responsiveness to their investors makes the REITs nimble and adroit. They adapt to a changing marketplace.
REITs also tell us about investor optimism, or lack thereof. Most didn’t raise much money in 2010, most didn’t even try. The fact, as evidenced through the local successful offering by American Assets, that this has all changed in 2011 suggests that the REITs are now ready to invest and bank on the future.
Sabin, of Excel, stated in a public forum recently that Excel conducted a buy/hold/sell analysis in 2006 and decided they wouldn’t be buying properties based on cap rates at the time (5 percent to 6 percent). This indicated to them that it was time to sell. So, Excel sold off many assets. Soon after selling much of their portfolio, they received offers for capital infusion. But because they felt that the timing wasn’t right for investing, they declined the money. While tempting — it’s hard to turn down money — they waited.
So, even if you are not an investor (and many of you are, even if you do not know it, because your investment advisers normally include individual REIT purchases or bundles of REITs as part of a diversified portfolio) it is worthwhile to follow the sector.
While some are strictly money REITs (mortgages, etc.), the asset REITs reflect a confluence of what is going on with the commercial assets and investors’ appetite for these assets.
For instance, in January American Assets sold 27.5 million initial shares at a price of $20.50 apiece, raising approximately $563.8 million. That transaction was the largest REIT IPO in more than a year.
The investment market mirrored what individuals felt: Last year was not the time to invest in real estate (a number of other offerings were pulled from the market in 2010). In contrast, this year perhaps represents the beginning of the moment to buy before the bargains begin to disappear.
The 109 REITs listed by Standard & Poor’s U.S. REIT Index have a market cap of approximately $356 billion. This index covers approximately 89 percent of the U.S. REIT market capitalization. The overall index is up approximately 123 percent since it bottomed in March of 2009.
The retail REITs ended 2010 with the highest increase in total returns in six years, 33.41 percent. According to the National Association of Real Estate Trusts, they outperformed the S&P 500.
The strategy that achieved these numbers, at least for most investment REITs, has been to take a conservative approach, gradually returning to a more dynamic investment strategy. Many of their investments reflect this “absence of risk” approach.
This is a good primer for individual investors: Purchase assets with promise, or at least those that are stable. Don’t go for the gold just yet. Employ a conservative approach, “feeling” each investment opportunity carefully before dynamically investing in the real estate market.
Also, purchase in good metropolitan markets. This includes markets with diversified economies, limited potential for new supply, growing populations and good quality of life. The REIT industry seems to be following these rules, and its actions are suggesting that following this Great Recession, there will be protracted recovery.