Allen Kenney

Maximizing REIT Returns

os@interactivestrategies.com — Wed, 14 Mar 2018 14:00:00 +0000

Maximizing REIT Returns os@interactive… Mar. 14 2018

Allen Kenney

publications@nareit.com

Allen Kenney is the former editorial director for Nareit.

Research says pension funds are leaving returns on the table by under-allocating to REITs.

Maximizing Returns

Research says pension funds are leaving returns on the table by under-allocating to REITs.

As baby boomers grow older, an estimated 10,000 Americans are retiring every day. That is putting mounting pressure on defined benefit pension plans to provide the steady income and capital appreciation necessary to meet their financial obligations.

Of the $24 trillion in retirement assets in the United States as of the end of 2015, about a third belonged to public and corporate pension plans. Real estate has long been a staple of these defined benefit funds’ portfolios, but are those allocations producing enough bang for the buck?

Nareit-sponsored research from Toronto-based investment consultant CEM Benchmarking indicates they are continuing to fall short in part due to underweighting REITs.

How Many Pension Funds Invest in REITs?

According to a Nareit analysis of data from Preqin, a financial research firm that tracks investment in alternative assets, some level of REIT investment is broadly based among government and private pension funds, endowments and foundations, which have a little more than $600 billion invested in real estate in the aggregate. More than 35 percent of these investors, on an asset-weighted basis, use REITs as part of their real estate portfolio. That equates to 40 percent of pension funds by number.

How Big Are Institutional Investors’ Allocations to REITs?

The data are a little murky. However, the Preqin numbers analyzed by Nareit show that of those that invest in real estate,

53 percent include allocations to REITs along with private real estate as part of their real estate portfolios. Within those blended portfolios, the average allocation to REITs was 34 percent.

In the entire universe of pension funds, endowments and foundations, REITs comprise approximately 19 percent of the total investment in real estate.

Are Pension Funds’ Allocations to REITs Large Enough?

The updated CEM study suggests they are not.

“Listed equity REITs once again emerged as the study’s top-performing asset class with the highest average annual net return; relatively low correlations with other asset classes, implying good diversification benefits; and superior risk-adjusted returns,” says CEM Benchmarking Senior Research Analyst Alexander Beath, who authored the study. “Despite the asset class’ sustained, measurable outperformance over the past 18 years, REITs continue to represent only 0.6 percent of total pension fund asset allocations, highlighting a significant missed opportunity to generate substantial returns with lower annual investment costs.”

Anecdotally, asset managers say their experience matches up with the CEM research.

“We think the allocations when measured as a percentage of the overall real estate allocation or as a percentage of the plan are still light relative to the benefits they provide,” says Geoff Dybas, head of Duff & Phelps Global Real Estate Securities team.

Scott Crowe, chief investment strategist and portfolio manager with CenterSquare Investment Management, estimates that defined benefit plans are split roughly down the middle in terms of those that view REITs as essentially proxies for direct ownership of real estate assets. All in all, pension plans’ underallocations to REITs stand out even more “considering that REITs own some of the best real estate in the world,” according to Crowe.

“I think that half the [defined benefit plan] market remains too closed minded as it relates to REITs,” he says.

What Is Keeping Defined Benefit Plans From Embracing REITs?

Historically speaking, the knock on REITs in the defined benefit community is their volatility, or as Andy Rubin, institutional portfolio manager for Fidelity, puts it, REITs are perceived as being “too stock-like.”

“The perennial argument always exists between measured and realized volatility,” Crowe says. “There are some investors that basically don’t treat [REITs] as real estate because [they have] daily pricing, and I think that segment of the market will always exist.”

The fact that REITs are public equities means they are subject to some of the “noise” that affects the broader investment market, according to Rubin. However, he points that the arguments change over the longer holding periods customary to defined benefit plans.

“Academic study after study have certainly confirmed that over appropriate length periods… that a lot of that shortterm noise sort of comes out in the wash,” Rubin says.

Will REITs Eventually Play A Larger Role In Pension Funds’ Real Estate Allocations?

Despite the historic under-allocation to REITs among pension plans, investment managers maintain that opinions in the space are changing.

“We believe that the view on REITs has clearly improved over time as a recognition of their benefits has come to light,” Dybas says.

In addition to a recognition of the investment benefits of REITs, the growth of the listed REIT market in size, depth and breadth has played a key role in calling attention to the industry, according to Rubin. Notably, in 2016, S&P Dow Jones Indices and MSCI elevated stock-exchange listed real estate companies from under the Financials Sector to a new 11th headline Real Estate Sector under the Global Industry Classification Standard (GICS). Rubin also points out that REITs offer exposure to segments of the commercial real estate market that aren’t available through traditional private real estate investment, such as data centers and cell towers.

Overall, Dybas says the firming of positive sentiment by pension plans and appreciation for the investment attributes of REITs should continue to bring larger allocations to the REIT space. “We think the future actually is a prosperous one for the underlying plan beneficiaries and participants to the extent there is an increased addition to the REIT allocation.

What CEM Found

The new CEM research is actually an update of a study first published in 2016 that analyzed data from 1998 to 2014 on the impact of asset allocations on the investment performance of more than 200 large pension funds holding a combined $3.4 trillion in assets under management. The updated study covered 200 public and private pension funds over the 18-year period from 1998 to 2015. In total, the funds included in the new study control approximately $3.5 trillion in assets.

CEM broke down the funds’ assets into 12 different categories to calculate their average annual net returns. The objective: analyzing the actual investment performance of the funds, not benchmark returns.

Some of the key CEM findings were:

Listed REITs had an average annual net return of 11.4 percent across the period, the highest of any asset class.
Listed REITs have low fees. Relatively low fees of 50 basis points—half of private real estate—contributed to listed REITs’ broader outperformance.
Listed REITs and unlisted real estate assets display similar levels of volatility. Once the CEM researchers adjusted for reporting lags and variation in returns across pension plans, listed REITs had net returns with volatility of 20.3 percent for the 18-year period, while unlisted real estate’s volatility was 18.8 percent.
Listed REITs and unlisted real estate show low correlations to the other asset categories.
Listed REITs and unlisted real estate are highly correlated and show that an investment in REITs is an investment in the real estate asset class.
Outside of fixed-income assets, REITs had the highest risk-adjusted returns. Excluding the fixed-income category, REITs had the highest Sharpe ratio among all the asset classes 0.44, which reflects the asset class’ strong returns and moderate average volatility. Unlisted real estate had a much lower Sharpe ratio, 0.31, reflecting lower returns and comparable volatility to REITs.
Listed REITs were the least used asset class of those involved in the study. Allocations to listed REITs within the pension plans averaged 0.6 percent of total assets. Conversely, investment in direct and other private real estate investments had an average allocation of 3.5 percent, despite producing average annual net returns of 8.7 percent; nearly 300 basis points lower than that of REIT investments.

What Do REITs Bring to Defined Benefit Portfolios?

Investment managers maintain that REITs offer a number of investment attributes that benefit pension funds.

Dividend Income

REITs must distribute at least 90 percent of their taxable income to shareholders as dividends, which have given investors a reliable source of income over time.

These dividends can help pension plans fund their retirement benefit payments to beneficiaries.

Liquidity

Whereas direct real estate owners can find it difficult to divest their interests in their holdings, REITs provide a liquid form of real estate investment. Like all owners of REIT stocks, defined benefit plans can buy and sell their shares on the market with ease.

“Providing liquidity is a critical role,” Dybas says. “Many of the pension funds that have embraced REITs have have been attracted to the liquidity that REITs afford investors in an asset class like commercial real estate that can be rather illiquid,” Rubin says.

Diversification

By investing in REITs, pension plans can round out their portfolios with an asset class that has a history of low correlation to the movements of the broader investment market. REITs respond to a different set of economic drivers and signals than other assets in the investment portfolio.. In turn, this has a smoothing effect on a diversified portfolio’s overall volatility.

Competitive Long-Term Performance

REITs’ history of long-term capital appreciation and delivering dividends have offered competitive returns relative to the rest of the investment universe. “The performance that REITs have generated over very long periods of time is really a superior commercial real estate return net of fees versus private real estate vehicles,” Rubin says.

“Over the long term, REITs have produced returns at or above private real estate returns because they own some of the best real estate in America and are managed by some of the best management teams in the world,” Crowe says.

Transparency and Governance

REITs provide investors the transparency of investments listed and traded on public markets. For pension fund managers with fiduciary responsibilities, this offers peace of mind.

Additionally, Dybas notes that as a growing number of defined benefit plans zero in on the environmental, social and governance (ESG) aspects of their investments, which should also make REITs appealing. “REITs allow pension plans to leverage their ongoing increased focus on sustainability as so many REITs are now increasingly focused on ESG, issuing robust sustainability reports as examples of their increased focus,” he says.

Peter Baccile on the Golden Age of Industrial Real Estate

os@interactivestrategies.com — Fri, 09 Mar 2018 19:45:00 +0000

Peter Baccile on the Golden Age of Industrial Real Estate os@interactive… Mar. 9 2018

Allen Kenney

publications@nareit.com

Allen Kenney is the former editorial director for Nareit.

CEO Peter Baccile left investment banking for First Industrial Realty Trust at a promising time for industrial REITs.

The Golden Age

Peter Baccile discusses the recent influx of bankers into REIT management teams, his first year on the job and what he calls the “golden age of industrial real estate.”

When talking about his move from investment banking to the C-suite of a publicly traded REIT, Peter Baccile invokes one of his mother-in-law’s favorite sayings:

“You have to take the cookies when they are passed.”

After three decades with some of the world’s foremost investment banks, Baccile says he jumped on the opportunity to become president of First Industrial Realty Trust (NYSE: FR) in September of 2016. A few months later, as planned, he added CEO to his nameplate when Bruce Duncan retired from the CEO position of First Industrial’s board of directors.

The offer to join Chicago-based First Industrial came at an opportune time personally, according to Baccile, with his youngest child preparing to leave for college. More importantly, though, he says he wanted to be part of a company that he had come to admire during his banking career.

“First and foremost, it was such a fantastic and rare opportunity to join a company I’ve known and respected for a long time,” he says. “My wife is excited about our new adventure in Chicago as empty nesters, and we have already taken advantage of many of the wonderful dining, cultural and entertainment options available here.”

In an interview with REIT magazine, Baccile discussed the recent influx of bankers into REIT management teams, his first year on the job and what he calls the “golden age of industrial real estate.”

When I first met you, you were at J.P. Morgan. You later moved on to UBS in 2012. In total, you spent 30 years as an investment banker. So many in and around the real estate business knew you as a banker. Do you think it caught people off-guard when they found out you were leaving for an executive position at a REIT?

Clearly, I loved my time in the banking industry as I called it home for virtually my entire working life. So, I am sure a few of my clients, colleagues and friends may have been mildly surprised with my move.

You will recall that the business changed dramatically during the 1990s as capital formation boomed in both the public and private markets. It was during that time period and into the early 2000s that the management and funding of real estate became more corporate and more sophisticated than it had ever been before. I very much enjoyed working with talented management teams on capital and operating strategy, M&A, and new growth strategies.

So, I felt well prepared coming into this new role and view my move to the operating side and joining First Industrial as CEO as a natural extension of the skills and experiences I gained during my banking career.

What was it about First Industrial and the opportunity there that made you want to make that kind of move?

I knew the company well from serving as a banking partner, working with Bruce Duncan, our chairman, and the senior management team very closely over many years. I experienced firsthand how the company fixed and strengthened its balance sheet.

I had a great appreciation for the company’s national portfolio, its platform and ability to create value through development, acquisitions, and leasing. I was impressed by the people—their tenure, their accomplishments, and their passion for our company and our business.

While that was certainly more than enough, we are in what I consider to be the “golden age of industrial real estate.” There is much opportunity ahead to grow cash flow and value. The growth in e-commerce and its impact on the global supply chain has been and will continue to be profound, and it’s a story that is still in the early chapters.

We’ve actually seen a few other bankers joining REIT management teams in recent years. Is that coincidental, or do you think that boards find something about that particular skill set attractive in the current real estate landscape?

First Park 94 (Chicago)

Capital is the lifeblood of the real estate industry, so as a banker, one would hope to be well-versed in the capital markets.

But it’s also the entire array of business skills that are required to successfully lead a banking group that are just as critical and applicable to a publicly traded real estate company: anticipating and meeting the needs of customers; identifying key trends; driving profitable growth; allocating capital to the right opportunities; developing lasting relationships; and working together with and motivating a team of talented professionals to achieve our goals and mission.

Bankers also have a good understanding of operating in the public domain.

What has been the hardest part of the transition?

There is a lot to learn in a short period of time. In the first six months, I visited with all of our market teams across the country and toured the vast majority of our 62 million square feet of assets. We have 500-plus properties and 1,300 tenants, so there are a lot of strengths and opportunities you need to understand. You develop a stronger sense of what drives tenant interest in certain submarkets versus other alternatives.

At the same time, you need to be on top of major personnel decisions, capital allocation and normal-course public company requirements. In addition, you need to be developing relationships with all the major stakeholders of the company. You learn to create a routine pretty quickly.

The other thing I realized early on is just how difficult it is to bring a new project to fruition in this extremely competitive market. The skill and patience of our team in working with our development partners, as well as government and regulatory agencies, to see projects from start to finish is an underappreciated art. In part, it also explains why new supply in industrial has been measured despite strong growth in demand over the past several years.

What was your top priority when you took over as CEO in 2016?

Get out and see our people, our properties, our markets and our customers’ businesses. I’ve always believed that any good leader knows the details of his or her business. The details make all the difference.

Everybody in real estate knows the importance of location. In the industrial business, our world is evolving rapidly. The needs of our tenants are changing almost weekly, so offering the right form and functionality to our tenants is an area where we must stay on top of the trends.

Not only that, but having professional property managers that are responsive to our customers and take care of our buildings is key to retention, especially in a down market. Customer service is ingrained in our culture, and it shows as we ranked number one in the independent Kingsley Index for industrial real estate providers reporting more than 30 million square feet.

We talk about it all the time. We are building and managing our business to perform well through the cycle. Bad times will come; we can do a lot now to ensure we perform well during those times.

It seems as though industrial and logistics real estate sits at the nexus of some of the top innovations and disruptions now affecting the global economy. What does that mean for your ability to strategize for the long term?

We have to be in constant communication with our clients. As I mentioned earlier, we have to stay ahead of the trend line for the form and functionality they require in their spaces. It’s changing and there are many factors that influence the functionality our clients will require.

Robotics, the availability of labor, the use required for that space—distribution, returns, same-day delivery, et cetera. We continually discuss these and other factors with our clients.

First Sycamore 215 Logistics Center (Riverside, California)

We also focus on consumption zones. Where are the people? Where are sales growing the fastest? Where is the wealth? Where is the population growing? It’s not that different from the way a mall developer would look at population and wealth demographics around a potential new project location.

So, it’s important for us to locate our buildings in markets where the demographics are strong, but also where they will be strong over the coming years.

What do you think will be the key issue that industrial real estate companies will face over the next decade?

The industrial supply chain is in a constant state of motion, accelerated by the force of e-commerce. What happens to that supply chain as distribution technology evolves and companies retool and retrench to compete are essential to our business. We need to be in touch with our customers and be ahead of these trends with respect to building and site design, size, features and locations.

And how far afield will we go to accommodate the needs of our e-commerce tenants? The more special purpose the use, the higher the risk on that asset.

What about the investors evaluating these companies? What should they be considering?

There are a wide range of factors one can consider, but as a company, we believe the best thing for us to focus on delivering for investors is long-term cash flow growth and value creation. They should want companies with well-located properties that are positioned to compete through the cycle and that can deliver above-average rental rate growth and total returns. They should also look at a company’s ability to to use its platform to create value through development and value-add investing in the context of proper risk management: Again, long-term performance through the cycle.

FTSE Nareit All REITs Index Down 3.24% in January

os@interactivestrategies.com — Mon, 05 Feb 2018 15:54:32 +0000

Timber, infrastructure sectors post positive returns to start the year.

Speakers Announced for Nareit’s CEO Forum & Advocacy Day

os@interactivestrategies.com — Mon, 29 Jan 2018 17:19:17 +0000

Lineup includes Sen. Cory Gardner.

ESG Forum Attendees Discuss Sustainability Best Practices

os@interactivestrategies.com — Mon, 29 Jan 2018 16:41:10 +0000

Topics of conversation included ESG issues from the perspective of investors and climate events.

Nareit Opposes REIT-related Bills in Hawaii

os@interactivestrategies.com — Mon, 29 Jan 2018 16:08:52 +0000

Nareit has opposed similar legislative proposals in past years.

REIT Sustainability All-Stars

os@interactivestrategies.com — Fri, 26 Jan 2018 18:00:00 +0000

REIT Sustainability All-Stars os@interactive… Jan. 26 2018

Allen Kenney

publications@nareit.com

Allen Kenney is the former editorial director for Nareit.

2017 Leader in the Light Award winners are using unique strategies to enhance their ESG programs.

ESG All-Stars

2017 Leader in the Light Award winners are using unique strategies to enhance their ESG programs.

Nareit’s annual Leader in the Light Awards recognize leadership in sustainability in real estate. The winners are judged to have produced superior, measurable results from the implementation of sustainable business practices.

“Sustainable assets and business operations are playing an increasingly critical role in the real estate industry, and REITs are on the leading edge of these practices,” says Fulya Kocak, Nareit vice president for environmental, social and governance (ESG) issues.

“REITs are recognizing that sustainability is not only a responsible business practice, but an effective one.”

Nareit presented the 2017 Leader in the Light Awards to the honorees in November at REITworld 2017, including new awards for innovation and individual leadership. Here are some of their more notable achievements in the last year.

Prologis

Prologies Kaiser Distribution Center (Fontana, California)

Prologis (NYSE: PLD) has captured the award in the Industrial category every year since 2012 and has been a frequent honoree since the program was started in 2005. The San Francisco-based industrial REIT has already surpassed its goals for cutting greenhouse gas emissions that had been set for 2020. The company also expanded its use of solar power and implemented a mandate for LED lighting.

Jeannie Renné-Malone, vice president for sustainability at Prologis, says that the company’s integrated approach to designing properties and business processes helps minimize environmental impacts. “It has been another year of significant sustainability accomplishments, both in terms of the progress we made toward our sustainability goals and the continued engagement with our stakeholders. As we work to achieve our goals and commitments, we’re also looking for the next innovative technologies and initiatives that will continue to move the needle—for us and for our industry,” she says.

Hear more about what Renné-Malone told Nareit about Prologis’ sustainability program in this 2017 episode of Nareit’s REIT Report Podcast.

Digital Realty

Data center REIT Digital Realty (NYSE: DLR) set a long-term goal in 2015 of powering its entire global portfolio with renewable energy. Overall, the San Francisco-based company grew its renewable energy supply by 80 percent in 2016. Roughly 40 percent of its power usage that year was offset by renewable energy as a result.

Digital Realty sources its renewable energy through utility-scale power purchase agreements, such as a wind farm in Texas that is expected to deliver enough energy in a typical year to power roughly 29,000 homes. The company expanded its utility-scale renewable procurement in 2017 with two additional wind and solar contracts.

Host Hotels & Resorts

Host's The Ritz Carlton (Naples, Florida)

Between 2008 and 2016, lodging REIT Host Hotels & Resorts (NYSE: HST) cut its green- house gas (GHG) emissions per square foot by 27 percent. In 2016, the estimated 20,000 metric tons of GHG emissions that were avoided from the previous year would be like taking roughly 4,000 cars off the road.

By 2020, Host hopes to cut its GHG emissions per square foot by 28 percent. The goal has been verified as a “science-based target,” meaning that it is in line with the commitment set forth in the 2015 Paris climate agreement to limit global warming.

“As part of our emissions reduction strategy, we invested over $30 million in targeted energy- and water-saving projects in the past five years that are estimated to generate $9 million in annual cost savings,” says Michael Chang, Host’s director of energy and sustainability.

Vornado Realty Trust

Tenant engagement is one of the hallmarks of the sustainability program at Vornado Realty Trust (NYSE: VNO). In practice, that takes the form of efforts such as seminars with tenants on how their sustainability goals align. Those discussions launched projects such as brokering meetings for tenants with the Environmental Protection Agency to discuss the Energy Star for Tenants program and the production of an instructional recycling video.

Macerich

Macerich's Santa Monica Place (Santa Monica, California)

The highlight of Macerich’s (NYSE: MAC) sustainability efforts in 2016 was its water conservation program. The retail REIT pursued nearly 800 water projects in the course of the year that will lead to 58 million gallons of water reduced annually.

Outdoor-focused initiatives included implementing smart irrigation systems and adding drought-tolerant plants to its landscaping. On the interior of properties, the company uses low-flow fixtures and automatic shut-offs in all common areas.

Ventas

Health care REIT Ventas, Inc. (NYSE: VTR) recently has taken major steps in the area of corporate governance. In 2016, the company’s board of directors voluntarily adopted a proxy access bylaw.

Additionally, the composition of the board was refreshed, with some longer-serving members replaced by new, independent directors. Currently, 30 percent of Ventas’ board members are women, putting the company above the S&P 500 average of roughly 20 percent.

Kilroy Realty Corp.

Kilroy's Columbia Square (Los Angeles)

Kilroy Realty Corp. (NYSE: KRC), a four-time Leader in the Light winner, prides itself on incorporating ESG awareness into its corporate culture. The Los Angeles-based office REIT’s sustainability commitment has led to such cutting-edge efforts as executing battery storage and solar power deals and integrating health factors and biodiversity into its office buildings. Kilroy Realty also has an active ESG advocacy presence, including informing the regulatory policymaking process on local and state levels.

In 2017, Kilroy Realty launched the Kilroy Innovation Lab, which formalizes the process for the implementation of sustainability pilot projects to provide credibility for successful technologies.

Boston Properties

888 Boylston Street (Boston)

Boston Properties (NYSE: BXP) was a recipient of a Most Innovative award. The office REIT recently completed large-scale development projects that achieved LEED Platinum certification.

“Boston’s most sustainable building,” 888 Boylston Street, will consume almost half of the energy of comparable regional office buildings. Additionally, the 61-story Salesforce Tower in San Francisco was designed specifically to promote the health and well-being of its inhabitants.

Alexandria Real Estate Equities

Alexandria's 409/499 Illinois Street (San Francisco)

Alexandria Real Estate Equities, Inc. (NYSE: ARE) received a Most Innovative award. The REIT, which specializes in collaborative life science and technology campuses, has made health and wellness a staple of its ESG platform in part through its participation in Fitwel, a building certification standard developed by experts in public health and design, including the Centers for Disease Control and Prevention (CDC) and the General Services Administration (GSA), to promote occupant health and build productivity through improvements to workplace design and policies. The Fitwel program evaluates all building and office environment features, such as proximity to public transit, access to fitness facilities, design of outdoor spaces, indoor air quality and healthy food options.

Hear more about Alexandria’s ESG program in this episode of Nareit’s REIT Report Podcast

Hersha Hospitalily Trust

Hersha Hospitality Trust (NYSE: HT) received an honorable mention recognition in the Lodging category. Notably, Hersha achieved a number of community-focused sustainability goals in 2016, such as raising $100,000 for Autism Awareness and donating nearly 5,000 hours to volunteer projects.

Leadership Personified

Equity Residential (NYSE: EQR), the Leader in the Light winner in the Residential category, made progress on a number of its key long-term ESG goals in 2016, including reducing energy and water consumption and installing renewable energy technologies in some of its apartment buildings. One of the driving forces behind the multifamily REIT’s sustainability success is Louis Schotsky, first vice president for investments and sustainabilty with Equity Residential and winner of the newly created Leadership Personified award.

Under Schotsky’s watch, Equity Residential has implemented forward-thinking sustainability initiatives, such as partnering with car-sharing business Zipcar in 2011. Residents of more than four dozen Equity Residential apartment buildings have access to on-site Zipcar services.

Schotsky’s peers credit him with a knack for making the business case for ESG projects and turning sustainability into a value-added feature for Equity Residential’s assets. “Lou does the right thing the right way,” Kocak says.

Multifamily REITs a Sector to Watch

os@interactivestrategies.com — Thu, 25 Jan 2018 21:00:00 +0000

Multifamily REITs a Sector to Watch os@interactive… Jan. 25 2018

Content

In the latest edition of Nareit’s REIT Report Podcast, Mizuho Securities analyst Richard Anderson recapped the REIT market's performance in 2017 and discussed some of the story's to watching in 2018.

Anderson noted that the different sectors within the REIT market offered a broad range of performance in 2017. The sectors that outperformed or underperformed didn't surprise many observers, according to Anderson, but the range of performance did.

Anderson was asked about the state of the retail REIT sector, particularly mall REITs. "The pace by which we saw store closings was a bit of a surprise," Anderson said. However, he pointed out that developments late in the year suggested an uptick in mergers and acquisitions could be on the way.

Regarding the tax reform bill passed at the end of 2017, Anderson said the new legislation would have positive implications for REITs.

In terms of stories to watch in the remainder of 2018, Anderson pointed to multifamily REITs. He said it could be a "nice holding pattern year for a sector with a long history of performing well" before seeing gains in the apartment sector in the second half of the year and into 2019.

(Subscribe to Nareit's REIT Report Podcast via iTunes.)

Publication type

Podcast

Teaser

Analyst Richard Anderson of Mizuho reviews the tops stories in the REIT market from 2017 and looks ahead to the rest of 2018.

Authors

Allen Kenney

Featured Image

Secondary Office Markets Leading the Way

os@interactivestrategies.com — Tue, 23 Jan 2018 15:15:00 +0000

Secondary Office Markets Leading the Way os@interactive… Jan. 23 2018

Allen Kenney

publications@nareit.com

Allen Kenney is the former editorial director for Nareit.

Secondary Office Markets Leading the Way

The momentum in office employment bodes well for the office property sector, including office REITs.

Office REITs are closely linked to the health of the macroeconomy, as job growth drives demand for office space. Office REITs in turn contribute to the economy by owning and operating properties that are essential for the American workforce. This symbiosis between office REITs and the national job market has facilitated both steady job growth and also the 7.7 percent total return that office REITs posted in the 12 months through November 2017, following a 13.2 percent return in 2016.

Office-using employment has lately outpaced employment in other industries like manufacturing, construction and retail trade. Total national office-using jobs rose 2.0 percent in the 12 months through November 2017, compared to 1.6 percent growth in total private payrolls. The momentum in office employment bodes well for the office property sector, including office REITs.

Office employment in Gateway cities has lagged secondary cities and other markets, reflecting a temporary lull in specific sectors, for example, financial employment in New York and tech jobs in San Francisco. This soft spot is reversing, however, as hiring in these cities rebounded over the past six months.

Office employment in secondary markets like Seattle, Denver, Dallas and Nashville is rising rapidly, with population growth above the national average, and booming local economies generating strong demand for office space.

See Also:
Read more on the fundamentals of secondary office markets in this Nareit Research paper.

How CEO Jim Risoleo Maintains a Fresh Perspective After 20 Years at Host Hotels & Resorts

os@interactivestrategies.com — Fri, 19 Jan 2018 14:15:00 +0000

How CEO Jim Risoleo Maintains a Fresh Perspective After 20 Years at Host Hotels & Resorts os@interactive… Jan. 19 2018

Allen Kenney

publications@nareit.com

Allen Kenney is the former editorial director for Nareit.

Self-avowed “people person” Jim Risoleo is now leading Host Hotels & Resorts after more than two decades with the company.

Host With a Smile

Self-avowed “people person” Jim Risoleo is now leading Host Hotels & Resorts after more than two decades with the company.

Jim Risoleo just finished his 21st year with Host Hotels & Resorts Inc. (NYSE: HST), and his first year sitting in the CEO chair. After taking over in January 2017 following Ed Walter’s retirement, he says he quickly realized that even after 20 years with the company, he still had plenty to learn about all that goes into managing a global portfolio of marquee hotels.

Risoleo held a variety of positions at Host before becoming CEO, including stints as senior vice president for acquisitions, chief investment officer, and managing director of the company’s business activities on the West Coast and in Europe.

“I would just tell you that 2017 has been a really busy year for me,” he said during an interview with Nareit in November. “It’s been a year of introspection, understanding our platform, understanding what we have and how I can take that platform forward. As CEO, I’m looking at our business through a different lens today.”

Risoleo also talked about the allure of iconic hotels, how to invest in hotels abroad and the technological innovations transforming the hotel experience for guests.

Jim Risoleo, CEO of Host Hotels & Resorts Inc.

Q: You’ve been in the CEO position at Host for about a year now. Have you found any aspects of the job that you hadn’t appreciated or anticipated? What part are you enjoying the most?

Let me start off by saying that I feel extremely honored to be serving as the CEO of Host. It is a great company that is truly differentiated from any other lodging REIT in the space today. Our scale, access to information, and the best geographically diversified portfolio of iconic hotels, combined with an investment-grade balance sheet, really differentiate us.

I’m a people person at heart, so I’ve spent the year getting to know our employees better. I enjoy motivating them and empowering them to look at the business from an entrepreneurial point of view and to find creative ways to bring value to our great portfolio of hotels.

I have to tell you I have great confidence in our people and in Host’s future.

Q: You’ve been with Host for more than two decades. In your position, what are the benefits of long tenure and how do you maintain a fresh perspective?

Having spent 20 years at Host before being named CEO made the leadership transition easier for everyone. There really was no impact on day-to-day operations, relationships with our various partners and other stakeholders, or the ability to focus on executing our objectives that were in front of us.

The Don CeSar (St. Pete Beach, Florida)

I rely and trust in my colleagues to bring me new ideas and bring new thinking to the table. My management style is not about being right all the time. It’s about being decisive, soliciting input, and taking risks and making decisions using the information and expertise that is available to me. I encourage people to be bold.

Q: Your educational training is in law, so what drew you over to hotels and hospitality?

I ended up in hospitality by default. I was at Westinghouse Credit Corporation in the late 1980s and early 1990s, where I was responsible for unwinding a significant portfolio of real estate assets and loans that Westinghouse owned. The investments were across all property sectors, so I got exposure to the hotel space, office, retail, residential and even raw land.

When the job was done in 1993, I had opportunities to go in to several different directions. I chose hospitality because I found it to be exciting, complicated, challenging and exhilarating, and I found myself surrounded by really great people. I think that’s a testament to our industry in general. The people that comprise the hotel space are smart, innovative, creative and a pleasure to be around.

Q: What are the most important benefits of the scale that a company like Host has?

Scale is a major competitive advantage. It gives us unparalleled access to information, where information is power. It also allows us the ability to access the investment-grade senior notes market, which decreases our cost of capital. Our scale allows us to bid on large, complicated, value-add assets. Lastly, it provides liquidity for our stockholders.

The vast, geographically diverse portfolio of hotels we own provides stability and mitigates the inherent volatility related to lodging real estate.

Q: Looking at the outlook for the lodging industry going forward, how would you characterize things and where do you see the sector in the property cycle right now?

The macroeconomic indicators which are highly correlated to lodging, such as GDP, corporate profits, business investments and unemployment, all look strong. That keeps me cautiously optimistic because I feel that the stage appears set for economic expansion.

I am cautious because we are in the eighth year of growth in our industry, and RevPAR (revenue per available room) has been decelerating in the last couple years, combined with supply which is coming online at the long-term historical average.

Given where we are in the cycle, a primary focus for us is expense controls. We have performed exceptionally well this year, given that our forecast shows us that we will have break-even margins, even with comparable hotel RevPAR growth of 1.15 percent at the low end of our third quarter guidance. That is exemplary given the current situation: the labor market, the fact that we’re at full employment, and we’re seeing wages and benefit costs continue to increase.

Q: Before you became CEO, you were overseeing Host’s operations in Europe. The joint venture ownership structure has been Host’s preferred method of investing in that market, so can you give us a little insight as to what that approach offers?

Jim Risoleo, CEO of Host Hotels & Resorts Inc.

We saw an opportunity to enter the European market in 2005-2006, when we were negotiating with Starwood Hotels and Resorts for a major portfolio acquisition. As part of that transaction, we were able to acquire six European hotels from Starwood. We elected to invest in Europe through a JV structure with two terrific investors, APG and GIC.

That structure allowed us to have solid institutional partners. It allowed us to negotiate an asset management fee that covered our overhead cost in Europe and also allowed us to structure a promoted interest based on the performance of the portfolio.

Q: Do you expect the company’s balance between business and leisure travel to shift at all?

Leisure is extremely strong right now. I think the leisure traveler feels really good about the employment picture in the United States, the record levels the stock market is performing at and strong consumer confidence. That’s going to ebb and flow over time, but we don’t see any changes to the leisure traveler continuing to spend money on experiences today.

The flip side is that although we’ve seen strong corporate profit numbers and strong business investment numbers, we haven’t seen that translate into an acceleration of demand from our corporate transient customers and corporate group business. Generally, there’s a lag between macroeconomic results and corporate transient demand of six months or so. We have not seen the corporate traveler come back, but we’re optimistic that the strong economic conditions should engender increased demand from our corporate customers.

Q: How difficult is it to find the iconic hotels that appeal to Host and that are also good investment opportunities?

I define iconic hotels as one of a kind, difficult to replicate hotels. They don’t come up for sale often. When they do, we’re in a unique position with our scale and our balance sheet, to seize the opportunity. Iconic hotels tend to be built in irreplaceable locations with high-barrier-to-entry markets. They have unique qualities and they have a unique guest following.

The last three hotels that we bought I would classify as all iconic: The Phoenician in Phoenix; The Don CeSar in St. Petersburg Beach, Florida; and the W Hollywood in Los Angeles. These are the types of assets that we think, over time, will provide the best long-term return for our shareholders.

Q: Going forward, what do you think will be some of the main design or layout changes that will emerge in Host hotels?

W Hollywood (Los Angeles)

I’d characterize it by one word: technology. Technology today is really fueling the changes and the look and the feel of the future hotel.

Our operators are mapping every room in the hotel, developing mobile check-in. Technology is allowing us to be more efficient in scheduling labor, resulting in increased productivity and lower cost. I think in the future more hotels will offer the ability to choose your room and check in on your phone, bypassing the front desk.

We’re seeing technology allow us to consolidate kitchens to drive efficiency between various food and beverage outlets, banquets and in-room dining. Technology is allowing us to make the lobby a gathering area and a more inviting destination.

Really, today, we’re seeing technology even tilting toward making our guest rooms feel more like our homes. I think you’re going to see technology allow guests to really set up their rooms to best meet their needs. Everything from asking for a virtual assistant for a wake-up call, the temperature of the room, the temperature of the hot water in the shower—this is all going to be done by voice or apps.

We’re going to see a lot of changes in technology that hit on two fronts: allowing the hotels to be run more productively and efficiently and, if not more importantly, giving customers what they want in a hotel stay.