Dawn Wotapka

Empire State Realty Trust Sees Multiple Sources of Upside from New York Focus

Kyle Gustafson — Thu, 15 Sep 2022 14:35:25 +0000

Empire State Realty Trust Sees Multiple Sources of Upside from New York Focus Kyle Gustafson Sep. 15 2022

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

Empire State Realty Trust says it is a great way to bet on New York City.

A New York State of Mind

Empire State Realty Trust says it is a great way to bet on New York City.

The Empire State Building's 102nd floor Observatory. Photo courtesy Empire State Realty Trust.

New York City is busy again, and that’s music to the ears of Empire State Realty Trust, Inc. (NYSE: ESRT), who says its portfolio of office, tourism, retail, and residential assets in Manhattan and the greater New York metropolitan area offers multiple drivers of upside.

The REIT’s fully modernized, amenity-rich assets incorporate its industry-leading sustainability, energy efficiency, and indoor environmental quality at attractive prices—well below new construction—and are designed to be the accessible, “flight to quality” destination in the market. A string of expansions and new leases from reputable tenants like LinkedIn, iCapital, Signature Bank and Progyny suggest that ESRT has the right idea.

Evercore ISI is optimistic. “While the office sector remains challenged, the recovery of lost occupancy and observatory net operating income (NOI) provides ESRT with a roadmap to solid earnings growth over the next few years,” the firm wrote in a client note earlier this year.

ESRT held its IPO in 2013 after a consolidation of dozens of partnerships and sub-partnerships created by Lawrence Wien, son-in-law Peter Malkin, and current Chair, President, and CEO Anthony Malkin.

The company owns and manages office, retail and residential properties that include 9.2 million square feet of rentable office space, 700,000 square feet of retail, and 625 recently acquired multifamily units. It is perhaps best known as the owner of the Empire State Building, a 2.85 million-square-foot landmark finished in 1931 that includes the world-famous Observatory, which was recently named the number one attraction in the United States and number three in the world in Tripadvisor’s 2022 Top Attractions. Through a combination of aggressive on-property actions and offsets, the entire commercial portfolio is carbon neutral as of 2022, and the company maintains aggressive on-property emissions reduction goals for 2030 and 2035.

“We are a play on New York City,” says Anthony Malkin.

Never Waste A Crisis

Despite past challenges and the operating environment ahead, ESRT is optimistic. The REIT has a laser-focused strategy on its key objectives, which include leasing space, boosting income from the Observatory, and maintaining its leadership in sustainability, along with actions it believes will continuously enhance shareholder value. “We never waste a crisis,” Malkin says.

Malkin took on more responsibility at the height of the pandemic in 2020 as chairman, president, and CEO. ESRT’s EVP and CFO Christina Chiu—who had previously spent nearly two decades with Morgan Stanley, most recently as COO for the global listed real assets division—was hired at the height of the pandemic in 2020. As Green Street wrote at the time, “the reshuffling of the C-suite appears to set the stage for a new period for ESRT.”

Chiu says the company offers “multiple avenues to play the upside that is underway in New York City.” She adds that the REIT has a flexible balance sheet with a low level of debt, substantially all of which is fixed rate, and a compilation of assets “that we believe are extremely well-positioned entering into what is an uncertain environment.”

The looming uncertainly is nothing like what occurred as the recent pandemic swept the globe and forced many office tenants to temporarily shutter their spaces. The REIT also had to close the Empire State Building’s lucrative Observatory business for several months during the pandemic, during which time it revamped its operations to an all-reservations model and has led to far greater profitability and customer satisfaction.

Flight to Quality Destinations

ESRT benefits from the market’s flight to quality with its retrofitted, fully modernized, healthy, energy-efficient buildings that offer attractive amenities at an accessible price point, with most of its portfolio located within a nine-minute walk to primary transportation hubs.

Since the IPO, nearly $1 billion has been spent on the redevelopment of the portfolio, Malkin says. The buildings make quality “accessible to a broad range of tenants, not just the ones that can afford or want to pay $150 (per square foot) rents in brand new buildings,” he adds.

ESRT’s well-positioned portfolio delivers modern, in-demand spaces at accessible rents. ESRT pioneered tenant amenities with the Empire State Building’s 16,000 square foot tenants-only fitness center, conference center, and a comprehensive set of in-building dining options. The Empire State Building will add a new, tenant-only amenity space to include a basketball court that converts into an all hands meeting space for 400 plus, a lounge, food and bar service, and “ESRTees,” a reservable lounge with two golf simulators. According to the company, these new amenities will be constructed in a “unique concourse-level space with vaulted ceilings.”

The company also announced plans to add new amenities to its Broadway Campus—comprised of six buildings in close proximity—which will include a roof deck on 1333 Broadway and an all-hands meeting space at 1400 Broadway, both of which will be available to all tenants of its Broadway portfolio.

In the second quarter, the company’s NYC office portfolio was 88.3% leased, with tenants from a wide variety of sectors that include: technology, media, and advertising (21%); finance, insurance, and real estate (20%); and consumer goods (19%).

“Our Tenants Really Like What We Offer”

Tenants frequently grow within the portfolio, with more than two million square feet of expansion leases signed by existing tenants in less than a decade of public ownership. While many industry watchers wonder how the work-from-home trend will affect property owners long-term, ESRT invalidates those concerns with a flurry of recent leases and expansions that demonstrate tenants continue to enter long term commitments for high quality space.

LinkedIn now leases more than 600,000 square feet at the Empire State Building on a long-term lease, which makes it the largest tenant that contributes 5% of the portfolio’s annualized rent.

Signature Bank now has 11 floors at 1400 Broadway that total 313,109 square feet through multiple expansions. iCapital, a global fintech company, has grown multiple times at One Grand Central Place since its first 17,573 square foot space was signed in 2017, and now boasts a footprint of 123,651 square feet, according to the company. Burlington Stores Inc. signed a full-floor expansion for an additional 35,000 square feet of office space at 1400 Broadway in Manhattan. In Connecticut, Franklin Templeton, a global investment management organization, renewed its lease for 80,000 square feet at 100 First Stamford Place, representing about 10% of the complex’s square footage.

As mentioned by Malkin on the company’s second quarter conference call, “2.2 million square feet of expansions in our portfolio since October 2013 – I don’t think that’s a coincidence. It means that our tenants really like what we offer. The price point is good and we choose our tenants well and that’s a benefit.”

“We absolutely believe in New York City. We feel very privileged to have the portfolio we have and the fact that we are in New York City.”

–Anthony Malkin, ESRT’s chairman, president, and CEO.

Early and Ongoing Sustainability Leadership

ESRT was a decade early in its focus on sustainability and healthy buildings, long before they became the key tenant priorities they are today.

Under Malkin’s leadership and vision, the company has cut carbon emissions for its portfolio by more than 40% since 2009 and works to ‘future proof’ its assets with investments in the necessary upgrades for tomorrow. Since 2009, long before ESG became a widely used acronym, ESRT has specifically reduced emissions at the Empire State Building by more than 54% and energy use by more than 40%. The portfolio’s tenants can literally breathe easier, the company says, particularly in the “IEQ Suites” which offer active bi-polar ionization, access to natural light, and low/no volatile organic compounds (VOC) materials.

The company was one of only nine awardees to receive Green Lease Leader Platinum by the U.S. Department of Energy’s Better Buildings Alliance and the Institute for Market Transformation. The award recognizes ESRT’s industry-leading integration of high-performance leasing and sustainability practices into business operations to deliver energy efficiency, cost savings, air quality, and sustainability for tenants. This specific achievement communicates to ESRT tenants and prospects that they can achieve long-term goals for carbon neutrality, Local Law 97 compliance, and return to the office in a healthy building just because they chose an ESRT property.

In April of this year, a coalition of New York City property owners, spearheaded by ESRT and supported by other NYC-based landlords, launched a blueprint to push commercial buildings around the country to achieve double-digit reductions in energy use and carbon emissions at commercially acceptable returns.

Known as the “Empire Building Playbook: An Owner’s Guide to Low Carbon Retrofits,” it was co-developed with the New York State Energy Research and Development Authority (NYSERDA) and supported by the Clinton Global Initiative. President Bill Clinton, Governor Kathy Hochul, and Mayor Eric Adams visited the Empire State Building Observatory for a special press conference to back the initiative for the official launch on April 21.

Clinton stated at the event, “(ESRT) has always been willing to share everything about how the Empire State Building and now all the related buildings achieved the savings they’ve achieved, how many jobs were created, how much their power bills go down, how much benefit ordinary people get. Now you get it in one place, nobody has an excuse anymore.”

The retrofit of the Empire State Building served as the initial blueprint for the Playbook, as it highlighted the fact that older buildings could be modernized to meet the highest sustainability demands of today. “We’re recognized as absolute leaders in this area,” Malkin says.

The Empire State Building’s elevators generate energy as they move, while thousands of windowpanes were refurbished on site to be ultra-insulated. ESRT transformed the building’s lighting system, which included an adaptive dimming system that adjusts according to light coming in from the outside. As a result, the building has reduced greenhouse gas emissions and become a symbol for what is possible around deep energy retrofits.

Everyday Retail With National Tenants

The company’s “everyday retail portfolio” features national tenants that make up 95% of the revenue from the company’s 700,000 square feet of retail space thanks to its highly trafficked locations in dense areas.

A 23,000 square-foot, three-floor Starbucks Reserve is set to open this year in the Empire State Building along with a Target at 10 Union Square East, the retailer’s second location in the ESRT portfolio.

Cosmetics giant Sephora, the largest retail tenant in terms of annualized rent with more than 11,000 square feet, and Urban Outfitters with 57,000 square feet, both have leases that extend to the end of the decade.

“As a company, we’re forward-leaning and we have to think about the future, our strategy, what we are, and how we add value for shareholders.”

–Christina Chiu, ESRT’s executive vice president and CFO

The Reimagined Observatory

While it’s not unusual for a REIT to own a landmark property, ESRT owns the World’s Most Famous—the Empire State Building and its award-winning Observatory Experience. The Observatory recently completed a $165 million redevelopment that includes a new, dedicated entrance, as well as an interactive experience that takes guests through a full museum of exhibits that showcase the building’s history from construction to current place in pop culture.

The attraction is a key contributor to income, helped by the fact that it was awarded Tripadvisor’s number one attraction in the U.S. and number three in the world. It is Uber’s most popular destination in the world.

When the business was forced to close due to the pandemic, Malkin says the company took the opportunity to become a reservation-only attraction. The new ticketing system smooths the flow of tourists and prevents lines and delays, the number one source of complaints prior to its institution, Malkin says.

Reservations allow the Observatory to utilize dynamic pricing during sunset, the most popular time due to the stunning views. The change in operations model has paid off: For the second quarter of 2022, while visitors remained at 60% of what they once were before the pandemic, net operating income recovered to 80%. “Now people don’t have to wait in line, and we deliver a better experience,” Malkin says.

Local Sharpshooter

In an off-market transaction, ESRT recently concluded a $307 million recapitalization with the Fetner Organization through which it garnered a 90% share of two multifamily properties. According to Chiu and Malkin, this is not a move that may seem to take it away from its core business, rather to increase its concentration on value drivers that benefit from the recovery of the Big Apple.

One property, The Victory, includes 417 units on 45 floors at 561 10th Avenue, an area known as Midtown West near Hudson Yards. At 345 E 94th Street, there are 208 units on 30 floors. ESRT touts this as an inflation-protection play that benefits from New York City’s demand recovery for residential buildings that are well-located, well-amenitized, and currently more than 95% occupied.

The move could seem unusual in REITland, where investors generally seek simplicity, but Chiu is undaunted and has stated that the move is a natural one for ESRT and adds value for shareholders. Both she and Malkin agree that additional apartment purchases will be done when it makes sense.

“We Absolutely Believe In New York City”

“As a company, we’re forward-leaning and we have to think about the future, our strategy, what we are, and how we add value for shareholders,” Chiu says. “In essence, ESRT is a New York City local sharpshooter.”

Blaine Heck, an analyst with Wells Fargo, says ESRT is operating in a “difficult segment of the commercial real estate market as the return to office has lagged many forecasts, and newly constructed office buildings have been added to the inventory in New York throughout the pandemic.”

That said, “ESRT has seen encouraging leasing activity at several of its properties, likely as a result of the significant capital spent on redeveloping their office assets,” he adds.

Overall, the REIT is comfortable with its New York City focus. “We absolutely believe in New York City. We feel very privileged to have the portfolio we have and the fact that we are in New York City. We also feel very privileged that we’re part of a dynamic cultural environment where people want to come to work,” Malkin says.

“You ask people where they want to go when they come out of college, and a majority of them still say ‘New York City.’ For us, it’s just a question of, ‘What’s the right way to play it?’ ‘What’s the best way to succeed?’” Malkin adds.

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REITs Recognized for LGBTQ+ Commitment

Kyle Gustafson — Tue, 31 May 2022 15:28:25 +0000

REITs Recognized for LGBTQ+ Commitment Kyle Gustafson May. 31 2022

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

REIT efforts to support LGBTQ+ employees are getting national recognition.

Open Arms

REIT efforts to support LGBTQ+ employees are getting national recognition.

Earlier this year, four REITs were named a Best Place to Work for LGBTQ+ Equality by the Human Rights Campaign Foundation in recognition of their sustained commitment to corporate policies, practices, and benefits pertinent to lesbian, gay, bisexual, transgender, and queer employees.

All four REITs received 100% rankings on the HRC Corporate Equality Index (CEI), a national benchmarking tool. The public recognition underscores the significant steps the REIT industry is taking to embed a focus on human capital issues within broader ESG strategies.

REIT magazine asked each of the four REITs—AvalonBay Communities Inc. (NYSE: AVB), Equinix Inc. (NASDAQ: EQIX), Iron Mountain Inc. (NYSE: IRM), and Kimco Realty Corp. (NYSE: KIM)— to talk about their efforts and why being committed to diversity, equity, and inclusion (DEI) is vital to success.

Kimco Realty Corp.

From its beginning over 60 years ago, teamwork, collaboration and inclusion have been core values at Kimco. Over the years, the company has been recognized numerous times for its unique work environment and positive culture, including the Great Place to Work recognition, all of which have been directly tied to employee sentiment through anonymous independent surveys.

And while we’re very proud of these external endorsements, we never want to get complacent. We recognize that we should always strive to improve the employee experience and be an even better company for which to work. To that end, in 2019, Kimco formed a Diversity, Equity, and Inclusion (DEI) Committee to create company-wide awareness and involvement.

The DEI Committee is made up of employee volunteers, across all disciplines of the company, who aspire to contribute by making a difference not only in the workplace but in the communities in which we live and operate our shopping centers as well as the REIT industry generally.

From the onset, the DEI Committee set out to establish a set of goals, some internal while others external, and each one has become a guiding strategic focus in furthering our DEI programs. Among those goals was working toward achieving a 100% score on the Human Rights Campaign CEI, demonstrating Kimco’s strong commitment to LGBTQ+ equality.

In reviewing the Human Rights Campaign CEI scoring criteria, our DEI team took notice of opportunities to make improvements to Kimco’s benefit programs and written policies that would signify to all associates, including those who identify as LGBTQ+, that equality exists in all aspects of employment at Kimco.

Leah Landro, EVP & Chief Human Resources Officer

Among the changes were modifications to the definition of family under the company’s medical, dental, vision, and life insurance plans, the addition of transgender surgery as covered services under the company’s benefit plans and clarifying in writing a long-standing practice of recognizing domestic partners as spouses under the company’s leave programs.

Beyond the workplace, during Pride month in June 2021, the DEI Committee launched an external community-focused campaign focused on supporting the LGBTQ+ community. The team promoted inclusive LGBTQ+ equity messaging at key Kimco shopping centers and brought that messaging to the company’s social media channels, all of which resulted in recognition and positive appreciation in the community. The company also showed its support by making a financial contribution to the Trevor project, the world’s largest suicide prevention and crisis intervention organization for LGBTQ+ children and their families.

It’s been exciting to see DEI evolve over the last several years, transitioning from what had been largely a human resources initiative to now spurring company-wide involvement as well as boardroom oversight. We’re now actively exploring DEI with an expanded group of stakeholders, starting with our supplier base. Our first step is collecting information on both self-identification and official certification for diverse-owned businesses, including LGBTQ+.

At Kimco, we’re steadfastly committed to embracing different perspectives and broadening our DEI reach such that we continue to demonstrate leadership for our associates, the communities in which we operate, our stakeholders, and the broader REIT industry. It’s through a diverse set of people that we garner diverse perspectives and grow even stronger as a company.

AvalonBay Communities, Inc.

Photo courtesy AvalonBay Communities, Inc.

AvalonBay is the only publicly traded multifamily REIT to earn placement on the Human Rights Campaign Foundation’s 2022 CEI and received a perfect score of 100. The CEI is the nation’s foremost benchmarking survey measuring corporate policies and practices related to LGBTQ+ equality. We’re proud to have this external recognition and endorsement of what we, at AvalonBay, already knew—we are a company that believes equality and opportunity extends to everyone.

For example, the Associate Rainbow Coalition (ARC) was founded at AvalonBay to promote awareness, foster a welcoming community where everyone can live their truth out loud, and provide professional development for LGBTQ+ associates and allies. ARC has a national leadership team comprised of associates across the company that plans activities throughout the year to connect and support LGBTQ+ associates at AvalonBay. ARC is one of seven associate resources groups offering a supportive space for associates who share a common identity.

Kurt Conway, SVP Brand Strategy and Marketing, and one of the executive sponsors of AvalonBay’s Associate Rainbow Coalition (ARC), an employee resource group for LGBTQ+ associates and their allies.

AvalonBay’s participation in the CEI came as a part of expanding its support of the LGBTQ+ community from one of policy and practice, to one that is also public. The CEI provides a roadmap for us to focus on the things that are important to LGBT associates, such as supportive and equal benefits, the ability to self-identify, training for all associates. Importantly, it also makes an unequivocal public statement about welcoming and celebrating LGBTQ+ people. We know overcoming silence has long been a key issue in the journey towards LGBTQ+ equality; without public support, no inclusion program is really complete.

Our efforts to join the CEI grew out of this drive for public affirmation and support for the community, started by a handful of interested and passionate AvalonBay associates. And while we may be the first publicly traded multifamily REIT on the list, this is an area we actually hope our competitors will copy. Too few companies have an official focus on LGBTQ+ inclusion. It’s our hope that more will, and we encourage any LGBTQ+ associates and allies out there looking for leadership in this area to take the first step.

Equinix Inc.

Two decades ago, Equinix was founded on the principle of deepening interconnections. Today, we uphold the same belief. A company committed to connection must also be a company committed to diversity and inclusion. Our social commitments, as outlined in our sustainability report, are to build a diverse and inclusive culture where every employee can say, “I’m safe, I belong, and I matter.”

We embed diversity, inclusion, and belonging in all of our business activities and empower leaders at all levels to create the best teams where employees are doing the best work of their lives. We create new channels and on-ramps to connect underrepresented communities to meaningful opportunities at Equinix. We also bring consistency to global benefits and standards that impact the health, safety, and environments of our workers.

“WeAreEquinix” team members in Singapore usher in Lunar New Year. Photo courtesy of Equinix.

At the same time we support the physical, mental, and emotional well-being of all our employees by providing opportunities to help employees along their journey towards achieving optimum health and lifelong wellness.

We recognize that all Equinix employees are instrumental in helping make Equinix a best place to work. There were several groups who especially contributed to these efforts. These include our Equinix Employee Connection Networks (now nine in total), Equinix Diversity, Inclusion, and Belonging (DIB) and Allies Councils, senior leadership, the Community & Belonging team (which includes DIB, Wellbeing, and Community Impact), and our Pathways/New-to-career talent acquisition team.

Brandi Morandi, Chief Legal Officer, Corporate Secretary, and CHRO

Of course, accountability to our ongoing goals is paramount. We commit to deliver on our strategy by tracking our progress against concrete and measurable D&I metrics. Our newly developed quarterly placemats, a snapshot of the business across various metrics, provide visibility into the composition and movement at each level and in each function for racial and ethnic groups in the U.S., and for women globally. This data will equip us to take informed action. We also publish our race and ethnicity metrics externally for added accountability.

While still early in our journey, our vision remains clear: for Equinix to be a culture where every employee, every day, can truly say they belong and matter, and for our workforce, at all levels, to reflect and represent the communities in which we operate. We acknowledge that we have more work to do, and we are fully committed to advancing DIB as a critical part of our business objectives and our global commitment to protect, connect, and power a more sustainable digital world.

Iron Mountain Inc.

At Iron Mountain, it is important that we create a culture where diversity, equity, and inclusion is in our DNA, where the words we say are matched by a universal sense of belonging, where every person feels their contributions are valued, their voices are heard, and all employees have the opportunity to achieve their goals and meet the needs of our customers.

Mountaineers embody the company’s culture of diversity. Photo courtesy of Iron Mountain.

Our employees will always be Iron Mountain’s greatest asset. Without diversity of thought, insight, and experiences, we cannot possibly make Iron Mountain the best place to be and to work.

Iron Mountain operates in 66 countries and, therefore, the strength of our Employee Resource Groups (ERGs) is particularly important in helping to create this culture globally and hold us accountable. Our LGBTQ+ ERG not only discusses the importance of allyship and prepares employees with tools to stand up and become better allies, but they have also challenged policies around the globe. Their work is paving the way for the LGBTQ+ community and all employees at Iron Mountain.

Our leaders’ willingness to embark upon this difficult and courageous cultural transformation journey is what makes Iron Mountain’s approach to DEI unique. They understand this requires so much more than sponsoring a program or event, which are important for awareness, but don’t create lasting change. They understand we must audit our systems, processes, practices, and policies and make the changes necessary to ensure they are inclusive; to assess our demographics, attitudes, and behaviors and hold everyone accountable. Because, after all, this cultural transformation will benefit all of our stakeholders—employees, customers, investors and board members.

Charlene Jackson, Chief Diversity, Equity & Inclusion Officer

It is often said that by increasing the number of underrepresented groups, an organization will enjoy greater profitability. Profitability, however, is not the result of merely increasing the numbers, it is the result of creating a culture of belonging where every employee not only understands their value, but also the importance of their role to the success of the organization.

We all must also understand the importance of creating a culture that is conducive to retaining diverse talent, thereby allowing the organization to benefit from the diversity of thought, insight, perspectives, and experiences exhibited by such talent. Properly valued, this diversity will lead to innovation, continual learning, and the ability to identify how to best serve the customer, whether it’s a large-scale global REIT or a small privately owned coffee shop.

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Reimagining Retail with Tanger Factory Outlet Centers CEO Stephen Yalof

Kyle Gustafson — Wed, 16 Mar 2022 14:06:33 +0000

Reimagining Retail with Tanger Factory Outlet Centers CEO Stephen Yalof Kyle Gustafson Mar. 16 2022

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

Tanger CEO Stephen Yalof sees a heightened focus on customer experience as key.

Reimagining Retail

Tanger CEO Stephen Yalof sees a heightened focus on customer experience as key.

With an entire career spent in retail, Stephen Yalof, president and CEO of Tanger Factory Outlet Centers, Inc. (NYSE: SKT), retains his lifelong passion for the industry and continues to look for new ways to enhance the customer experience. It is a strategy he believes is vital for the REIT’s continued success in the years ahead.

Yalof became president and COO of Tanger, a leading operator of open-air outlets across 20 states, in April 2020 before succeeding Steven Tanger as CEO in January 2021. Before joining Tanger, Yalof served as CEO of Simon Premium Outlets, part of Simon Property Group, Inc. (NYSE: SPG). Earlier positions include leadership roles at Ralph Lauren Corp. and The Gap, Inc.

Yalof joined Tanger just as shoppers at the REIT’s centers were forced to stay home in the early days of the pandemic. During that uncertain time, Yalof reflected on how to do things differently and make products available to Tanger shoppers. The answer he came up with was to focus on digital initiatives, improve food offerings and experiences, and add more local businesses—ideas that have lured back both tenants and shoppers who are now spending more time at Tanger’s 36 centers.

REIT magazine spoke with Yalof about corporate values, frictional vacancy and the benefits it can bring, and how the need for exercise pants turned into a virtual shopping experience.

In what way did the pandemic change how you operated the business?

We never laid off anybody during COVID. We truncated our hours, but we kept our staff. In fact, once stores began to reopen we actually used our staff to go out and shop.

It started with me. My son went back to college and took my Adidas sweatpants. I wanted to go for a run but couldn’t find my track pants, so I called the general manager of our shopping center in South Carolina and asked her to do me a favor and send me three pairs of pants. She replied, ‘I’ll do you one better,’ grabbed her phone, pushed FaceTime, and I literally shopped the store with her. That’s how it started. That became our virtual shopping model.

Stephen Yalof, president and CEO of Tanger Factory Outlet Centers, Inc.

When I was at The Gap, I worked for (former executive) Mickey Drexler. He used to say: Whenever someone calls you up with a good idea, multiply that by the 50,000 people who have the same idea but aren’t going to give you a call. I figured that if I could use that service, why couldn’t our legion of VIPs and Insiders (the company’s loyalty shopping programs) do so as well. It turned out to be a pretty interesting way of getting in front of our customer, providing them a service they didn’t have. Some of the transactions ended with us just getting to know our customers a little bit better, but a lot of our transactions ended with a sale.

We thought that was an interesting program for us to take to the next step. What we learned is that our customers like to have that window shopping experience online but like to execute in store. By setting up our website as a place for people to see products and offering them the opportunity to order online and pick up curbside, or hold the purchase in the store, we are able to ensure they aren’t disappointed if something isn’t available at their local center.

We also gave them a third way of shopping, which is that virtual shopper program. In fact, we just brought in a new chief commercial officer to help us think about digital initiatives, and we’re going to grow that business.

How have outlet mall designs changed over the years and what will customers see next?

We learned a lot during COVID. We learned that people like to buy online and pick up curbside, so curbside pickup has become something that, fortunately for us being open-air, is a little bit easier to establish. As we build new shopping centers, and we’ve got one on the books that we will open up in 2023, we’ll have special curbside drive lanes. It’s also something that we’re thinking about incorporating into our existing centers in the future.

One of our goals is to get an outlet customer to stay longer when they come and to shop more frequently. A lot of that has to do with the digital communication and the amenities that we’re adding, whether it’s a Christmas tree lighting event or the holiday décor coupled with better food options to encourage customers to stay longer and ultimately buy more.

Where do you see the company in the next five years, 10 years?

Tanger Outlets in Fort Worth, Texas. Photo courtesy of Tanger Outlets.

We spent a lot of time last year thinking about our mission, our vision, and our values. In our vision statement, we say that we want to go from being a real estate company to a customer-experience company.

I think one of the big pivots for us is to consider how you become a customer experience company. I think it starts with those digital initiatives that we talked about. As the brands evolve and become more omnichannel, I think the retail space and certainly the retail space service providers need to think through how the customer wants to shop and meet that customer where they are.

What we’re finding is the customer that we’re cultivating right now cares a lot about sustainability, not only in the brands that they choose to shop, but in the shopping centers that they choose to shop in, so we’re engaging not only in e-charging stations for electric vehicles but we’re also doing a lot more solar initiatives.

Last year we did an initiative with a company that puts honeybees on the roof of a building. It was a great customer draw and we took schools and classrooms up and they met with our beekeepers. Our Chairman Steve Tanger and I, along with our senior leadership team, have made a commitment to reduce our carbon footprint and be more environmentally conscious going forward. A lot of those amenities and that thoughtfulness will be part of not only the shopping centers of the future but also the pivot for what existing shopping centers will ultimately look like.

Outlet centers are known for big retail players. What role do small businesses play?

There’s always going to be some empty space in the shopping center, it’s frictional vacancy. For example, we made a deal in Rehoboth Beach, Delaware, with Ulta Beauty, Inc. We had to move some people around in order to create space, so we will have some temporary vacancy.

In a case like this we’ll go out into the local communities and source a tenant to live in that space for that period of time. It gives them the opportunity to test the water before they decide to go full throttle into the retail business, so we get to see a lot of those brands holding their first retail pop-up.

We lost a lot of tenants during COVID due to brands restructuring or closing their stores. We found ourselves with more store vacancies than we’d had in a long time. Our general managers went to work and started knocking on doors in local marketplaces to try and get tenants to move in and occupy a lot of that space. In doing so we may have uncovered some of the brands of the future, whether it’s a Byrd’s Cookie Company in a market like Savannah, Georgia, or My Cookie Dealer shop in Riverhead, New York that opened up in our center and has lines out the door.

Last year, we set up a minority business initiative. When we found minority-owned businesses that might not have had the seed capital to open up the store, we worked with them on the rent. We gave them some buildout dollars to help them set up. We gave them the opportunity to open and get started and we then had a great tenant that had their own local following and was able to bring a new customer into our shopping centers.

We pride ourselves on being a field-led team, a local company. One of our core values is that we want to be participants in the communities that we serve. If you look at a lot of our shopping centers in these smaller communities, we’re the first job for a lot of people in those marketplaces. We’re the biggest gathering place and we’re probably, in a lot of these markets, one of the biggest revenue generators and the biggest taxpayers. If you have 100 stores, that’s a lot of jobs for a lot of people. That’s an important part of the community.

How has Tanger addressed stakeholder demands for more action in ESG?

We’re really the stakeholder and the ones that are demanding action. We’re a people-first, locally driven company that cares about the communities it serves. You can talk about it all day long, but you really have to walk the walk.

Tanger Outlets in Riverhead, New York. Photo courtesy of Tanger Outlets.

We express that in how we choose the national holidays that our team celebrates. We’re one of very few companies that gives 40 hours of paid time off to our employees to volunteer because we think that’s a really important part of our business. If we’re going to be a field-led, community-driven company, we need to get out and serve the community.

During COVID, or when there’s been a disaster in one of our communities, we’ve become a place where people gather for a blood drive, food distribution, Red Cross distribution, clothing drives, etc. We use our parking fields and our common area as a place for people to set up their relief stations. For Voter Registration Day, we partnered with HeadCount and set up voter registration at more than half of our shopping centers.

It starts from the example that the leadership sets, but also I think it’s important that leadership listens to the people in our organization.

How are you putting your stamp on your position?

I have 30 years-plus of outlet shopping center experience. I started my career leasing outlet centers in the early 1990s when outlet centers were a lot different than what we see today.

Omnichannel retail options are increasingly important for Tanger Outlet customers.

I think I’ve had great experience working for both the landlord side and retailer side. I understand the retailer’s perspective almost as well as I understand the landlord’s perspective, and in some instances maybe better because I’ve negotiated deals from both sides.

I also think this business is a relationship business. The people I can pick up the phone to call are folks that I’ve been friends with and have had relationships with and have done business with for a long period of time. That eases a lot of the difficulty in getting things done.

It’s fun when younger people ask me what’s the first thing to know about being in the shopping center business. I can teach them how to do the math, how to merchandise, build a leasing plan, how to pick up the phone and call people, but I can’t teach how to really care about the people you do business with.

I always find that the people who are the most successful are the ones who care about the people they do business with. People want to do business with the people they like and trust who also treat you fairly. You’re not going to necessarily win on every deal that you do, but if you have a really good reputation in the business, people are going to want to do business with you.

Tanger has established that for a long period of time. They’ve always been a great company to do business with as they’ve changed and modernized. As the years have gone by, they’ve understood what’s important to the customer and gone after it. I’m continuing to carry that legacy.

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Ben Butcher Discusses STAG Industrial's Focus on Continued External Growth

rich@richgarcia.com — Fri, 28 Jan 2022 02:11:55 +0000

Ben Butcher Discusses STAG Industrial's Focus on Continued External Growth rich@richgarcia.com Jan. 27 2022

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

Singular Focus

STAG Industrial has set a course for external growth by analyzing asset potential across the market.

Few real estate companies can say they weathered the COVID-19 pandemic unscathed, but with approximately 40% of its assets supporting some level of e-commerce activity, STAG Industrial, Inc. (NYSE: STAG) benefitted as homebound consumers accelerated their online purchases.

Boston-based STAG, shorthand for Single Tenant Acquisition Group, celebrated a decade as a public company in 2021. The REIT has grown into one of the country's largest owners and operators of industrial real estate, owning more than 103 million square feet in more than 500 properties across 40 states. To lower risk, STAG operates in upwards of 60 markets and 45 industries, where each of its tenants—which include Amazon and FedEx Corp.—account for less than 4% of revenue.

This is a big change from the private equity real estate portfolio that President and CEO Ben Butcher took public in 2011. Back then, it had just 14.2 million square feet across 26 markets. Flex and office space filled about one-fifth of the space, compared with just 0.3% now. In terms of equity market capitalization, the change is striking: It was $290 million then, compared with more than $7.5 billion now.

STAG recently announced that Butcher is expected to step down as CEO and become executive chairman on July 1.

REIT magazine spoke with Butcher about STAG's view on market analysis, operating in the 'new normal,' and where he hopes to travel next, among other issues

What makes STAG unique among industrial REITs?

STAG Industrial, Inc. President and CEO Ben Butcher. Photo: Bryce Vickmark Photography.

The biggest differential to investors is that we don't focus on development. Our degree of uniqueness is probably derived from our devotion to agnosticism.

We avoid, for the most part, the use of 'decision rules' in our investment decisions and in developing our corporate strategy. We believe that maximizing future cash flow is our primary responsibility and that virtually everything that will affect future cash flows can be analyzed.

It follows that such analysis is always preferable to utilizing decision rules. Remember that the world is not black-and-white, it is shades of gray. Many of our competitors will utilize an investment rule such as 'only buy in the top X markets'. In doing so, they are essentially saying 'the asset located in the X+1 market is not worth consideration at all.' Does that make sense? We look at assets in all the fungible U.S. markets—around 65 individual markets with a minimum of 28 million square feet of fungible industrial product.

In our view, market 'X' isn't good and market 'X+1' isn't bad, they are just different, and these differences can be accounted for in our analysis. Other decision rules employed by some of our competitors include minimum lease term, minimum tenant credit rating, and building age.

Who do you consider your competitors?

On acquisitions, we compete with all manner of equity capital from sovereign wealth funds to individual investors. Because of our focus on individual asset purchases, where there is less competition, we primarily compete with regional real estate private equity and individual investors. On leasing our owned assets, we compete with the other industrial owners' new and existing product.

In terms of who we compete with for investor dollars, it is the other public REITs, with First Industrial Realty Trust, Inc. (NYSE: FR) probably being the closest peer. Because of our focus on growing externally through acquisitions, none of the other industrial REITs is really a direct peer due to their focus on growth through development.

What are some of the topics you are discussing with your tenants?

They range from building expansions to sourcing additional space across the 60-plus markets in which we operate, and sustainability-related upgrades, such as efficient lighting conversion. These themes were highlighted in our recently completed fifth annual tenant survey. Tenants are looking to enhance the resilience and strength of their supply chains as well as to support new growth initiatives, although labor availability remains a concern and a limiting factor in these efforts. The majority of respondents indicated e-commerce activity has increased over the last 12 months, consistent with the belief that there has been a structural change in consumer behavior. The survey also revealed a noticeable increase in the importance of sustainable building operations as a measure of overall building fit.

How did STAG navigate the pandemic?

Surprisingly well. After some initial disquiet about operations and capital markets, the industrial market fundamentals took off—driven largely by the rapid uptake in e-commerce and supply chain issues. Going to 100% virtual was a pretty easy step for us. I have been a bit surprised by how readily corporate culture has been maintained.

Has STAG changed in the 'new normal'?

The realities of the new normal were becoming evident pre-pandemic; the last two years have served to accelerate in-place trends. Work from home was already a vibrant topic and now is a given in order to be a competitive employer. The question now is 'how many days in the office?' 'Work from anywhere' is now the new frontier. One thing I am convinced will not work going forward is mandating time in the office. To the extent that we, as managers, believe that employees' time in the office will benefit the company (and the employees), we actually need the employees to see how time in the office benefits them. Our office space may end up being considered just another benefit we offer to our employees.

How has the surge in e-commerce shaped your business model?

We remain focused on serving our existing and potential customers' needs and maximizing our cash flow in doing so. Our underwriting methods readily assess current conditions as well as periods where tailwinds such as e-commerce are not as evident.

The current and projected market rent growth allows us to acquire assets at lower initial cap rates and still maintain our return thresholds for cash flow over time. Our existing portfolio, primarily assets located around the perimeter of population centers, is and will be a part of the e-commerce supply chain going forward. There is e-commerce activity in over 40% of the buildings in our portfolio.

What's next for industrial real estate?

Sustainability progress and operational efficiency improvement through artificial intelligence (AI), predictive analytics, and digital connectivity. There is a lot going on in what has been a very staid industry for decades, a lot of low-hanging fruit.

What is the biggest opportunity and challenge facing STAG?

We are fortunate that our strategy of focusing on pricing inefficiency in the industrial market and taking advantage of that inefficiency to buy individual assets accretively appears to have plenty of runway, with our sweet spot in the $5 million to $30 million range.

To buy the $1.1 billion to $1.2 billion that we're projecting to buy this year, we're having to look at more assets or underwrite more assets to get to that number. That really focuses us on execution. The U.S. industrial real estate market is over $1 trillion, and STAG's share of that is less than 1%, so there's a lot of potential for continued external growth. The biggest challenge will probably be continuing to identify, hire, and retain the kind of excellent employees that have driven our success to date.

A STAG Industrial facility in South Saint Paul, Minnesota. Photo courtesy of STAG.

What are the current design trends for industrial real estate?

Sustainability in design, such as LEED certification, and lower net energy consumption. Carbon capture concrete is getting some attention. New construction continues to both get taller, in the form of clear height, and shorter, in terms of mezzanines/floors within tall buildings to allow more 'human scale' interaction between product and employee. This 'human scale' interaction is still necessary to make sure that what you order online gets in the right box and sent to you in a timely fashion. Increasing reliance on robotics and AI will continue to change how warehouses are operated in the future.

How can the REIT industry improve diversity in its top ranks?

There are likely few short-term fixes as we attempt to balance diversity and effectiveness. There are simply too few qualified candidates and tremendous demand for those that exist. The best answer may be developing diversity candidates from the ground up by hiring and training. This will take some changes to existing practices. One thing that we preach is that a 'good enough' candidate today may be a better long-term employee in terms of their attitude, energy, and loyalty than the 'best' candidate available during the interview process. This allows us to consider a broader range of potential hires and will, I believe, produce a better work force over time.

How is STAG adjusting increased calls for ESG reporting?

We view ESG reporting as something that you simply need to do to be relevant for most investors. We have been doing ad-hoc reporting of various initiatives across all three components for years. I am proud to say that the team has pulled updated reporting together in our inaugural sustainability report that will be published shortly. Our achievements in this area are worth noting. In fact, we recently received our 2021 GRESB Public Disclosure letter grade rating of B. Our score is above the REIT average and ranked second of the 10 industrial real estate companies scored by GRESB.

What do you do for fun when you aren't a CEO?

I play golf, hike, and travel with my best friend and bride, Linda. I read a combination of fiction and non-fiction—a book a week at least. I also enjoy spending time with our dog, Cali. This is my first time having a dog—I had cats as a kid—and the 'unconditional love' thing is true.

What advice would you offer to your younger self?

Looking back there are certainly decisions that could have been better made. I am proud that, in my career, I wasn't afraid to take chances, to explore ideas, and opportunities. I would tell my younger self that there is more time than you think to do those 'riskier' things and still end up in a good place. One thing I tell all 20-somethings who seek advice is to travel while you can. It will never be easier for them than it is right now.

Where was your favorite trip and what's on your bucket list?

I have made two trips to New Zealand and can't wait to go again. One individual trip stands out from earlier in my life. I went to the 1992 Summer Olympics in Barcelona as a guest of Sports Illustrated. I had amazing access to both athletes and events in a magical city. We even got to ride on the bus to a game with the original 'Dream Team.' There is still so much to see and do. Portugal is next. It is the only country in western Europe that I haven't visited yet.

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Welltower CEO Shankh Mitra's Approach to Problem Solving During the Pandemic

Kyle Gustafson — Thu, 11 Nov 2021 15:33:12 +0000

Welltower CEO Shankh Mitra's Approach to Problem Solving During the Pandemic Kyle Gustafson Nov. 11 2021

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

Welltower CEO Shankh Mitra says the health care REIT has taken the right steps to position itself for growth over the next decade.

Winning Decisions

Welltower CEO Shankh Mitra says the health care REIT has taken the right steps to position itself for growth over the next decade.

As a recreational mathematician, Shankh Mitra likes to do a lot of puzzles. Being able to find solutions to complex questions—for fun—is one of the strengths Mitra brings to his role as CEO and chief investment officer of Welltower Inc. (NYSE: WELL).

Taking over as CEO during a global pandemic certainly utilized Mitra’s talents in problem solving and validated his tendency to “think about what can go wrong, not what will go wrong.”

As he looks ahead, Mitra says Welltower has the right talent as well as operating platforms and relationships in place to bolster growth over the coming decade. Favorable demographic trends and constrained supply are additional benefits for the years ahead.

Mitra started at the Toledo, Ohio-based health care REIT in 2016 and worked his way through the ranks to become chief investment officer in 2018, a role he still holds. Welltower, one of the older REITs that was founded in 1970 as Health Care REIT, owns senior housing and outpatient medical properties in the United States, Canada, and the United Kingdom.

REIT magazine spoke with Mitra on a range of topics including being a crisis leader, the importance of social and cognitive interaction for seniors, advice for young professionals, and ways to ensure that employees are heard.

You took over as Welltower CEO during the pandemic. Tell us about that.

We had a long transition plan in place, although the timing changed a little bit and it just happened to coincide with a pandemic.

Welltower CEO Shankh Mitra

When I took the top job, Tom (Thomas DeRosa, who stepped down as chairman and CEO in October 2020) was, and has continued to be, a mentor. I didn’t change anything about what we were doing, but having said that, your track record starts on the day you take over. I’m a huge believer in track records. There is no denying the fact that that’s the day my track record started, and it was a very tough time.

Friends and colleagues will tell you that I’m a crisis leader. I almost do better when things are not good than when things are great. I just can’t help but think about what can go wrong, not what will go wrong. While it is not fun going through a pandemic, I knew that for investors, opportunities always arise when you have massive stress in the market. It was a period of tremendous hardship and unique opportunity.

Prior to the pandemic, we were prepared for a down cycle. If you go back and look at what we have done—not just what we’ve talked about—you will see that this company prepared for a recession, which everybody should have been preparing for, right? I told my board in the summer and fall of 2019 that we’re going to have a down cycle, most likely next year.

We pushed out maturities, sold a lot of assets, and raised a lot of equity. So we were prepared for a recession. We just weren’t prepared for a pandemic that would tax our senior population. We made a significant pivot from defense to offense—as much as you could during a tough time.

What lessons do you think you learned during the pandemic?

First, to state the obvious, that resident and employee safety is absolutely critical. This has never been an issue for our operators. We have always had a tremendous focus on quality. We have a team that works with our operators on quality of care and that became the front-and-center component of resident and employee safety during the pandemic.

We all sort of became personal protective equipment (PPE) coordinators; how could we get our hands on PPE and testing and get it to our operators? At the end of the day, we provide a lot of things to our operators: procurement, thought leadership, capital, but ultimately, it is up to them to execute on the ground.

Finding the right partners, standing shoulder to shoulder with them is critical. You’ll see that if you look back over this industry during this pandemic, the majority of capital providers just gave up and left their operating partners stranded. We did the opposite. People have long memories in this business.

Another thing that we realized is that COVID was not the only issue for our seniors. Social and cognitive interaction is so important, and we saw a significant deterioration as people were not getting exercise and interacting with one another. This impacted their quality of health and cognitive abilities. Social isolation is a big issue. Loneliness is a big issue for seniors, for everyone. We all got a taste of it when we had to stay home for months and months and couldn’t see friends and loved ones. This soon became as serious an issue as COVID for our operators.

What would you do differently for your seniors in another pandemic?

I think we’ve done a pretty good job on the key things I’ve mentioned. We also created a partnership with pharmacies and academic institutions before the pandemic and we leveraged those relationships to really help get our operators through the pandemic. Welltower has been a big proponent that the housing of seniors should be seen as a part of the healthcare continuum. We have been at the forefront of that, and we will continue to promote that.

What do you think your company is doing right and what might need to change?

What we have done right is have a strategy that’s very focused on having the right operating partners. Our operating partners are the ones who are on the ground level, so finding the right partners and creating the right incentives is critical. You can’t overstate the importance of these relationships.

Another thing we have done well is that we have created the right alignment with our operating partners. This business is fraught with a misalignment of interests of how capital gets paid, how the operator gets paid, and what they should focus on. This needs to be corrected, and we have done a lot of that. Frankly, that’s been a focus of the last five or six years that I’ve been here.

One of the things that we have done exceedingly well is that we were the first ones to make a significant investment in data analytics before it became a buzzword. We started this program in 2016-2017, when no one talked about predictive analytics and AI. Today, we’re years and years ahead of everyone else. What I like to say is that we have a doctorate in data analytics compared to our real estate peers, but we’re still in middle school relative to what technology companies, retail, insurance, and financial services have done. We have a long way to go.

As for improvement, we need to really engage more with our public and private peers in the health care real estate industry and, frankly, senior housing and the housing industry in general, to have a broader view. We have started that, and we’re going to continue to make a lot of improvements there as well.

Photo courtesy of Balfour Marketing.

Is the labor shortage affecting you?

We have actually acquired a tremendous amount of talent. While others were focused on trimming headcount, we went the other way. We hired 40-plus new colleagues last year, and so far this year we have hired about 60. We have gone on an acquisition spree of assets, new relationships, and new colleagues—new talent to really bolster this company for the next decade. As a result, we’ve emerged as a partner of choice, an employer of choice, and an investor of choice in this very large opportunity set in which we find ourselves.

Where do you see Welltower in the next three to five years?

I don’t just think about the here and now, but where we are in the business cycle and what lies ahead. I call myself a through-market cycle thinker. I am a passionate student of business cycle thinking and always have been.

We have laid down a very solid foundation through acquiring this talent and these partnerships. We have the most comprehensive end-to-end operating platform in the three countries where we do business. We have laid out the framework of operating and developing new relationships. In three-to-five years, they will bear fruit. The foundations are there for meaningful growth and we will work hard to try and deliver. In addition, we have the tailwinds of rising demographics and constrained supply, so I’m very excited about the next three-to-five years.

We are developing a wellness housing business focusing on the younger 55-plus population and plan to grow that business significantly. We are also excited about our medical office business, which continues to grow very significantly through development. We continue to be the partner of choice, the employer of choice, and the investor of choice in the broad scope of health care and wellness-oriented infrastructure in the space.

What advice would you offer to students considering a career in commercial real estate?

My advice to somebody coming out of college or business school is to find the right place and, most importantly, the right mentor. I’ve been very, very fortunate to have had terrific mentors who taught me the business and spent a lot of time with me.

I think that today people focus too much on ‘what firm do I work for?’, ‘how attractive is the brand recognition?’, or ‘how much will I get paid?’ when considering their first job. These are important things, but a lot more important is the person you work for or the team you work with. That’s where you learn how to think about the business, how to create relationships. I personally think that should be what colleges and graduate schools focus on.

Ultimately with a 30-40 year career in front of you, the training and the relationships you make from the very beginning will have a big impact. I’m incredibly grateful for the people who spent time with me. My mentors continue to mentor me today for no other reason than we forged a close working relationship, developed mutual respect, and have remained friends for a long period of time.

My first boss coming out of business school taught me how to think about modeling, restructuring, and investing. That was a long time ago, but I still think about how he taught me to think about the business. I’m very fortunate that I did not go for the company that would have paid me the most, I went for the person that I thought would teach me the most. That has been the winning decision of my career.

What can be done to improve diversity in this industry?

It’s a concerted effort. The reason you want diversity is to have a variety of opinions and differing approaches to issues. Our main focus is very simply that we hire competent people from all walks of life, and that’s what we have done to come up with, in my opinion, the most diverse and talented team in the industry. We’ve created an organization that is extraordinarily focused on results and competence and is tremendously diverse.

I’d like to highlight another aspect of diversity. When Welltower selects candidates, I actually interview them, from analysts to EVPs. Pretty much everybody who works at Welltower has gone through me. One of the not-so-obvious aspects of diversity I think about is introverts versus extroverts.

People who are like me, extroverts, tend to like people who are extroverts and, soon enough, your organization becomes a bunch of extroverts. Half of our colleagues are introverts. You have to focus on how to bring people in who might not know how to sell themselves in a half hour conversation, but that doesn’t mean they can contribute any less. You have to be attuned, you have to be focused, you have to be reaching out and then you will find that there’s a lot of talent, raw talent, regardless of the exterior.

You also need to create an environment where people feel they have a voice and an equal voice. It’s not only important that you have a very diverse group of leaders and employees, but you also need to know how to keep them. We know how to create a culture where everybody’s voice matters.

No individual is smarter than an eclectic group of people who can think differently, come from different backgrounds, and can see a problem in different ways. What we do is complex and all of us have different skill sets, but none of us have all the skill sets. Everybody comes from different life experiences, different walks of life and different expertise. You can bring these folks together and put them in a room and get amazing results.

We might be the only company where the investment committee process is open to the whole company. Every week, we run an investment meeting. Everybody can ask questions and everybody can learn from each other. People raise their voices and say, ‘have you thought about this?’ Diversity is worth nothing unless you can create a culture where we can bring everyone together, where everybody can raise their voice—and their voice is heard.

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Extra Space Storage's Steady Growth Yields Results

Kyle Gustafson — Mon, 04 Oct 2021 13:16:59 +0000

Extra Space Storage's Steady Growth Yields Results Kyle Gustafson Oct. 4 2021

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

Extra Space Storage hits a growth milestone and showcases a modernized sector that continues to expand.

Making Moves

Extra Space Storage hits a growth milestone and showcases a modernized sector that continues to expand.

Extra Space Storage CEO Joe Margolis. Photo courtesy Extra Space Storage.

Back in 1998, Joe Margolis’ job at Prudential Real Estate Investors was to find companies worthy of the capital that would get them to the next level. He was offered a meeting with a small self-storage operator with big ambitions, and he remembers thinking: “No way, it’s not an institutional asset class. We would never invest.”

Despite those initial reservations, Margolis liked the business model and the growth projections he saw and today he is the CEO of that company, Extra Space Storage, Inc. (NYSE: EXR). The REIT is a sector giant that has doubled in store count since 2013 and recently hit a growth milestone as it celebrated onboarding its 2,000th facility.

The top five self-storage REITs have a combined market capitalization topping $100 billion, according to Nareit data, and posted total returns of 44% through the end of July, making the sector among the top performers in the industry.

By renting to people undergoing life changes—moving or sending children to college, for example—or boat and RV owners and businesses, self-storage can weather the ups and downs of the economy.

“Storage has historically been a recession-resilient sector,” says Spenser Allaway, a senior analyst with Green Street. In the case of Extra Space, the REIT also has a reputation for having a “strong management team that is well deserved,” she adds.

Indeed, in the last decade, the S&P 500-member company based in Salt Lake City has recorded an 831% return to shareholders, making it one of the best performers in the REIT industry.

The company operates across 40 states and Washington, D.C., with 156 million square feet of rentable space. It has also been mindful to diversify. No single metropolitan statistical area (MSA) accounts for more than 13% of revenue—Los Angeles comes in right at 13%, followed by New York/New Jersey at 12%—while no single property is worth more than 1% of the portfolio, a strategy designed to buffer it from regional economic shocks.

Pandemic Uptick

While many businesses found themselves challenged during the COVID-19 pandemic, the self-storage industry attracted robust demand.

“People were introduced to self-storage who had never used it before,” Margolis says. As life shifted and people were suddenly shuttered indoors, leasing picked up as consumers made room for offices and learning spaces, or used the downtime to remodel a kitchen or clean out the garage.

“The number one reason our customers are using storage is moving, and that’s kind of always been the case. But during the pandemic, moving decreased and lack of space increased” as a reason given for leasing space, Margolis explains.

The crisis forced the company to be nimble. We had to “adapt quickly and almost overnight,” recalls Bridgett Currie, an Extra Space store manager/district team leader in Napa Valley. “It allowed us to innovate our online presence both with customers and our internal communications.”

That work paid off. For its second quarter, the company reported same-store occupancy of 97%, up from 94.2% a year earlier. Same-store revenue jumped by 13.6%, while same-store net operating income (NOI) rose by 20.2% compared to the same period in 2020.

Industry watchers don’t expect these gains to dissipate anytime soon. Self-storage “has maintained the forward momentum that began during the pandemic, powering into the summer with strong growth on both the occupancy and rent sides,” Moody’s/Reis says. “Our projection is that the conditions for the sector remain very positive, and the effects of the typical seasonality …will be relatively muted.”

Margolis doesn’t think the pandemic’s end—whenever that occurs—will be followed by customers rushing to empty their rented space. “I don’t think we’re going to flip a switch and everyone’s going to go get their stuff out of storage,” Margolis says.

Green Street’s Allaway agrees: “Much of the COVID-related demand should prove stickier over time than transitory storage uses, such as moving, that contribute to the seasonality of the business.”

New Look

Just a few decades ago, self-storage was a largely unattractive product relegated to the edge of town. “First-generation storage was out near the dump with gravel driveways, single-story cinder block with a barbed wire fence to go with the guard dog,” Margolis recalls. “It was a scary place to go at night.”

This is the environment in which Ken Woolley, who did part-time research for a self-storage facility while a graduate student at Stanford University, founded Extra Space in 1977. He was the boss who knew “every store manager, their spouse’s name, whether they had kids, what they liked to do on the weekend,” Margolis says. “He had that personal relationship with every employee, and he worked really hard to create a company that valued people.”

In 1998—following that meeting Margolis initially didn’t want to take—the company was recapitalized through a joint venture with Prudential. It went public in 2004 and, a year later, purchased all of Storage USA’s 458 properties from General Electric for about $2.3 billion.

The acquisition of SmartStop Self Storage, Inc. for $1.4 billion came a decade later. Margolis, a graduate of Harvard College and the Columbia University School of Law, became CEO on Jan. 1, 2017, after serving as chief investment officer from July 2015, when he joined Extra Space, until his promotion. He was also a board member at the REIT from 2005 until 2015.

While the sector has become a respected asset class, there is much growth potential ahead as ownership remains fragmented, with small owners and operators still owning the lion’s share. Extra Space owns about 8% of the self-storage market, while sector peer Public Storage (NYSE: PSA) controls about 9%, according to public company filings and square footage data provided by the Self Storage Almanac. Some 45% of the overall market is institutional quality that isn’t owned by REITs, while another 25% is non-institutional quality, according to company estimates.

Unlike the low-slung product of yesteryear, today’s product is bright, colorful, landscaped, and modern, with architecturally attractive locations close to the residences they serve. The company is also listening to investors demanding better environmental considerations. In 2020, Extra Space undertook more than 100 solar installations, while half of the wholly-owned properties have solar installed.

Extra Space’s locations could also be considered prime. In 2020, the company completed a site near the SoFi Stadium in Inglewood, California and in 2024, it expects to finish developing near the Hollywood Park Arena. These will be state-of-the-art, climate-controlled facilities in high-profile retail locations that highlight how storage has changed, the company says.

Instead of a facility on the outskirts of town, storage features plenty of light, open space and eye-catching architecture that is, in some cases, within walking distance of urban centers. In Miami, a building exterior is painted to look like a piece of modern art, while the exterior of a facility in Los Gatos, California resembles a loft community.

Properties like this facility in Albuquerque, New Mexico show the new face of self-storage. Photo courtesy of Extra Space Storage.

Staying Focused

Extra Space has no plans to go beyond its core storage focus, Margolis says. “A lot of companies fail because they drink their own bathwater, and I don’t want to be that company that says, ‘You know, we’re really good at storage so let’s do cloud storage or industrial.’ We’re good at what we do,” he says. “We’re a storage company, we’re going to be a storage company. We’re not going to look to branch out into other things, but we’re going to continue to get bigger.”

Nevertheless, the company has been smart in going beyond simply owning and leasing storage space. “Extra Space has also been ahead of the curve in emphasizing ancillary revenue streams,” Allaway says.

Indeed, the REIT creates additional income from management fees, which alone brought in more than $52 million in 2020, along with tenant insurance. Launched in 2019, its bridge lending program provides short-term loans to current and prospective third-party management partners on existing properties and has the additional benefit of creating a potential acquisition pipeline.

Yet no matter how big the company gets, Extra Space’s 4,000 employees will always remain key, just as they did when the company was founded, Margolis says. These are the people who interact with clients who may be going through a divorce or who may have lost a parent, so having employees who can be reassuring and professional is essential.

“I can’t know every name, but I still go on the road all the time to talk to employees,” Margolis says. “Our goal is that every store manager sits down with me at least once every two years as an opportunity to talk to the CEO.”

In investor presentations, employee-related accolades receive just as much attention as those relating to stock performance. In 2018 and 2020, Extra Space was named a “Glassdoor Best Places to Work” winner, while it also received commendations from Forbes for being a “Best Employer for Diversity.” This year, it was dubbed one of Utah’s “Best Places to Work”.

Currie, who has been with Extra Space for eight years, praises the inclusive atmosphere, the “amazing benefits,” the work/life balance growth opportunities and the fact that the company welcomes “innovation for a better tomorrow.”

“With Extra Space, I envision my career unfolding. They make it possible to grow further into my role and beyond,” she says. “I see myself with the company for many years to come, and I’m excited to see what the future brings.”

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CEO Mary Fedewa is Ready to Take the Lead at STORE Capital

Kyle Gustafson — Wed, 28 Jul 2021 20:05:04 +0000

CEO Mary Fedewa is Ready to Take the Lead at STORE Capital Kyle Gustafson Jul. 28 2021

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

STORE Capital’s new CEO Mary Fedewa is leading the net lease REIT to the next level.

STORE 2.0

STORE Capital’s new CEO Mary Fedewa is leading the net lease REIT to the next level.

STORE Capital CEO Mary Fedewa. Photo by Mark Peterman.

STORE Capital Corp.’s (NYSE: STOR) new CEO Mary Fedewa believes the net lease REIT is at an inflection point. Having come through the pandemic with a proven business model, she is ready to take the company she co-founded a decade ago to the next level.

Fedewa was named CEO in April, following her promotion to president in 2020. She was appointed COO in 2017 and has served on STORE’s board of directors since 2016. She helped found the Scottsdale, Arizona-based company, whose name stands for Single Tenant Operational Real Estate, in 2011.

STORE owns spaces leased by businesses focused on the service sector. Tenants include daycare centers, movie theaters, fast-food restaurants, and car washes—the very segment hardest hit as customers stayed home throughout the pandemic. The REIT navigated the coronavirus crisis without seeing a dramatic drop in rental income or having to trim its dividend, which the company boasts has the highest growth rate among its net lease peers.

REIT magazine spoke with Fedewa about everything from building a multi-generational company to the importance of patience.

What was it like taking on STORE’s top job during the pandemic?

It’s been an exciting journey. As one of the founders of STORE, I’ve been helping build the company from the start. The pandemic has been tough for so many people, but it did serve as an opportunity for STORE to continue to prove out our unique business model. We were able to show how we help customers and were there for them in a tailored way during a really difficult time.
I believe there is light at the end of the tunnel and that we’ve largely come through the worst of the pandemic. I have a lot of faith in both our business model and our customers and it’s evidenced by how well our business has done.

What did you learn from this experience that you might not have otherwise?

From a business standpoint, the main thing that I learned is that we’ve built a really strong business here at STORE for long-term real estate financing and that we serve really vital industries and customers. We fill an important need in our economy and our customers really are resilient and vital to the U.S. middle market and the overall economy.

What I learned personally was that there is a very large human toll from this pandemic that should not be overlooked. Many people were challenged with job losses, health concerns for themselves and their loved ones, and education worries for their children. There is a much bigger aspect to the pandemic than just economic issues. It is a real event affecting humanity.

One positive takeaway is that I am in awe of how resilient we are as humans. People were able to reset and adapt quickly and persevere in a difficult time.

How do you think your previous service to the company will benefit you as CEO?

I’ve spent a lot of time building the team and platform here. I like to call this new chapter STORE 2.0 and I am excited by the opportunity to build a multi-generational company. My leadership style is all about being collaborative with the team and allowing others to shine. I liken it to being the conductor of the symphony—and I see myself as really that, being able to build the team, watch them grow, and produce really beautiful music and harmony together. I view my role as the ‘conductor’ as an honor and a gift. I am excited to watch this team really prosper.

I believe that STORE is at an inflection point because we have built a really great platform, which I was here for every step of the way. We have come through COVID with a validated business model and the triple net lease industry has prospered.

Now we have an opportunity to take that to the next level as there’s such a big market out there that we can really serve. I think that we can continue to scale this platform, and I, along with my team, are looking forward to helping many, many more customers.

STORE Capital CEO Mary Fedewa. Photo by Mark Peterman.

What legacy does executive chairman, former CEO, and joint co-founder Chris Volk leave?

Chris was pivotal in helping to make very important foundational decisions when we started this company. We all carefully made decisions at the outset on how to build this company with the longevity of the business in mind for many generations to come. The stronger you build the foundation, the better you can thrive in all circumstances.

There aren’t a lot of other female REIT CEOs. Why is that, and what will you do to change this?

Great question. I don’t really know why there are not a lot of female CEOs in the REIT world, but what I can tell you is at our company we’re going to continue to focus on diversity and inclusiveness. We’re going to continue to cast a very wide net for qualified candidates in every position, and then we’re going to continue to cultivate leaders and get the very best leaders throughout the organization. We’re doing everything we can here to raise the next generation of leaders.

How would you describe your leadership style?

I’d say it’s inclusive, collaborative, energetic, and enthusiastic. I have a lot of trust in the team, but I hold people accountable. I believe it is all about giving people the opportunity to thrive and creating a learning environment where we all get to learn and grow.

What makes STORE different from other retail landlords?

STORE takes a very customer-centric approach. Our customers matter and it’s very important to us that we add value and that at the end of the day our customers are better off for doing business with us. We try to not make it about the actual transaction. We’re not a one and done transaction type of company. It’s about building a long-term relationship where we can be there for them as they continue to grow and prosper.

It’s also not about only helping them with the real estate, but also about helping them grow and generate new ideas for their businesses through our initiatives like the Inside Track Forum, STORE University, and our website resources.

We believe it is all about a holistic relationship and it’s important to us that we are adding value to our customers and positively contributing to the world. We focus and think a lot about our tenants’ customers and the employees they are giving jobs to and how we are part of creating those jobs.

Photo courtesy STORE Capital.

There is plenty of discussion that e-commerce could mean the end of physical retail. What do you think of that notion?

E-commerce is just another channel for consumers to be able to get the goods and services that they want. However, most of our portfolio is concentrated in service industries such as childcare or veterinary services, which are hard to get over the internet. On the retail side, we’ve been focused on experiential retail where the brick and mortar is a need, not a want.

Most businesses are thinking omnichannel and want to have the ability to have somebody come into the store as well as get service over the internet. I do think that we will pick our spots, but for what we’re focused on, the internet is an important channel for our customers, in addition to their brick and mortar.

What is STORE doing right, and what needs to change?

I believe what STORE is doing right is our customer focus, our partnership mentality, and bringing repeat business.
What I would like to be different is for even more people to know about us and understand that STORE provides a really valuable service and have more people know and take advantage of what we offer.

Where do you see the company in three to five years?

The market is huge and therefore so is the opportunity. We estimate that 200,000 companies could use our real estate financing solutions. Right now, we have 522 customers. Therefore, the opportunity set is large.

Up Close

Name
Mary Fedewa

Education
BA in business management, with a concentration in finance, from North Carolina State University. Graduated Summa Cum Laude.

Family
Husband, Dale, and two children

Hobbies
Running, golfing, hiking, and meditation (guided, mantra, and stillness)

Organizations Supported
“I enjoy supporting the arts and serve on the board of trustees of Scottsdale Arts, which focuses on visual and performing arts. I am proud of my efforts on behalf of the organization and in particular supporting the learning and innovation programs. The arts develop important skills like problem solving, empathy, and creativity.”

According to financial filings from earlier this year, STORE’s marginal equity returns topped its peers. What specifically are you doing differently?

STORE is focused on adding value. It starts with the large marketplace, then it continues with being able to add value to the customer, and finally, being able to get paid for the value we add.
We’re very much focused on profitability and delivering high, risk adjusted returns for our investors based on our approach.

ESG is an important topic with investors. What are you doing in this space?

We’re doing a lot on ESG and it is very much top of mind. Our goal and mission is to leave the world a better place than when we started. We want the world to have sustainable resources and not deplete everything that’s out there.

We don’t operate the businesses, but we own the real estate. And we provide consent to do things on our properties, whether it’s solar panels, electric car chargers, replacing windows, efficient lights, etc. We are completely aligned with our customers to make their properties more sustainable. We also have plenty of active programs going on right now with our customers for sustainability initiatives.

What do you hope stakeholders take from your sustainability report?

We just published our second corporate responsibility report. The inaugural showcased our commitment to ESG and our excitement around it and the connection and partnership we have with our customers.

The second showcases even more some of the companies that are involved in sustainable ESG activities where we own the real estate. It addresses some of the EV and solar panel projects that we’re working on. The report gets deeper into the initiatives that we have and those that we will start. I want people to take away that we are really committed to making the world a better place, and we’re excited about our part in doing that.

What do you do for fun when you aren’t being a CEO?

I like to spend most of my time on meditating and yoga. I’m also golfing a lot these days. In general, I love to be outside in nature and enjoying my family.

What advice would you offer to college students who are thinking of a career in commercial real estate?

I’ve been in this business for a really long time—for over a couple of decades and it’s the most amazing business. If you are in the triple net lease space, it’s fun to watch how the businesses operate. You get to see so many businesses and focus on what they do really well.

What advice would you offer to your younger self?

Patience. Hang in there. The journey is unfolding as it should. It’s okay. If everything is good, it’s okay. If something didn’t work out just as you thought it should, it actually did. Trust your intuition.

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SITE Centers CEO David Lukes Explains How the Pandemic is Reshaping Retail

Kyle Gustafson — Fri, 11 Jun 2021 13:19:40 +0000

SITE Centers CEO David Lukes Explains How the Pandemic is Reshaping Retail Kyle Gustafson Jun. 11 2021

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

SITE Centers CEO David Lukes says the pandemic showed how its open-air shopping centers have become a natural connection to neighborhood customers.

Bridge Builder

SITE Centers CEO David Lukes says the pandemic showed how its open-air shopping centers have become a natural connection to neighborhood customers.

With a challenging year now behind it, SITE Centers Corp. (NYSE: SITC) is looking ahead to the prospect of pandemic-induced societal shifts and data-driven leasing strategies fueling strong cash flow growth in the years ahead.

“The early COVID months certainly put pressure on our business, but a durable bounce-back has already started and SITE Centers is in the early stages of a growth cycle,” says David Lukes, SITE Centers president and CEO. Lukes is also a member of Nareit’s 2021 Advisory Board of Governors.

Lukes has an extensive resume in the retail real estate sector, having served as: president and CEO of Equity One, Inc. prior to its merger with Regency Centers Corp. (Nasdaq: REG); CEO at Seritage Realty Trust; and, COO at Kimco Realty Corp. (NYSE: KIM).

SITE Centers—known as DDR Corp. until October 2018—owns about 140 open-air shopping centers in suburban markets from coast to coast. The company’s focus is on centers in high-income household areas; it owns 78 properties in locations with an average household income of $106,000—a group more likely to have jobs allowing the flexibility to work from home.

“Open air shopping centers are clearly a post-COVID winner and our company is in a great position to step into the growth tailwind,” Lukes says.

While the Beachwood, Ohio–based company did see some disruption during the crisis, more than 80% of the portfolio is anchored by an essential tenant, and many tenants, such as theaters and fitness facilities, are at least partially reopening.

SITE Centers CEO David Lukes

Working from home is driving higher and more consistent traffic, while the urban-to-suburban shift is also boosting the suburban population and housing activity. Retailers, meanwhile, continue launching new anchor concepts and in the fourth quarter total leasing volume was the highest level since the third quarter of 2018.

“Who knew convenience was so convenient? Post-pandemic trends are already favoring open-air shopping centers as the most reliable bridge to suburban customers,” Lukes says.

“More people in the suburbs and more workers with flexible work-from-home policies. It’s hard to imagine a better backdrop for open-air shopping centers. Occupancy and rent growth, here we come,” he adds.

REIT magazine talked to Lukes about what he sees for the future of SITE Centers and how the pandemic is reshaping retail.

You have spent the majority of your career in retail real estate. How did you get your start in the industry?

I was lucky enough to stumble into the shopping center industry a little over 20 years ago. I opened a small field office on the second floor of a local property and the door to my office entrance was right between the pizza guy and the hair salon.

The first thing I learned about retail was that it was a very personal business. When you work at the local shopping center, you quickly realize that you’re going to run into just about everyone in town—small business owners, local politicians, families, the local police and fire departments, and daytime office workers.

Most American suburbs that were built after World War II don’t have a traditional main street, so the local shopping center is one of the few places where people from the community cross paths on a weekly basis. This puts enormous responsibility on a retail landlord as tenant selection is a critical part of long-term real estate value creation. Each shopping center develops its own personality and culture depending on which tenants occupy space at the center. This is probably the most unique aspect of our business.

How would you describe the state of the retail industry today?

The societal shifts that are currently happening as a result of the pandemic are having the most dramatic effects on open-air shopping centers that I’ve seen in my career. Our tenants do best when they serve the convenience needs of customers and those customers have adapted quickly over the past year.

Suburban living is highly desirable, and some form of work-from-home appears to be a permanent part of the American economy. These trends are resulting in a large increase in leasing activity for open-air retail properties and we are seeing occupancy and rent growth as a result.

Did you think these societal changes will be permanent for the industry?

It’s hard to overestimate the long-term effects of the work-from-home cultural change we’ve seen in the past year. I’m amazed at how fast our own company adapted to remote work and adopted tools like Microsoft Teams and Zoom. Like many companies, we’ve accepted this change to our corporate culture, and we will likely have one to two days of work from home and three to four days of work from the office as a permanent benefit to our team members.

We are certainly not alone in this decision as recent national surveys show over two-thirds of employers and employees expect some sort of flexible work policies in the future. This is a gigantic benefit to shopping centers. A typical working family has traditionally visited shopping centers over the weekend whereas now they’ll be proximate to our properties another day or two a week.

If you are a convenience-based retail or service tenant, imagine what this permanent work-from-home flexibility means to your potential gross sales. And if you’re a shopping center landlord, imagine what this means to the durability and growth of market rents.

Up Close

Name
David Lukes

Education
Bachelor’s degree in environmental design from Miami University, a master’s degree in architecture from the University of Pennsylvania, and a Master of Science in real estate development from Columbia University.

Family
Wife, Elizabeth, and three daughters (ages 21, 18, and 13)

Hometown
Glen Ellyn, Illinois

Currently Reading/Recently Read
Noble House by James Clavell, From Third World to First by Lee Kuan Yew, The Splendid and the Vile by Erik Larson

Favorite Activities or Hobbies
Tennis, Upland Bird Hunting, Fly-fishing

Organizations Supported
Meals on Wheels, Carver Center, Sedona Arts Center

What lessons did you learn from COVID?

Certainly, any executive team is rightfully focused on capital allocation and long-term strategy. But during COVID, I think we all learned the great importance of corporate culture. Many investors are focused on ESG and stakeholder capitalism and I learned some important lessons on why those attributes are important for long-term success.

We learned that we were doing some things right, like empowering managers to make fast decisions, and we learned that we needed to improve on other aspects such as communication and inclusion.

You mentioned remote work technology, are there other IT Initiatives that you see changing your industry?

Remember I said I opened my first office on the second floor of a shopping center? Well, one of my first jobs was to try and understand our customers so I hired a few temporary employees to write down license plate numbers in the parking lot and get zip code data from the DMV so I could get some window into our trade area. It seems a bit silly now, but 20 years ago that’s all we had.

In the past three years, there has been a complete transformation of our understanding of our properties because of the explosion of cell phone geo-location data availability. Today, I can tell you how many customers go to a Starbucks at our property daily, what percentage of those customers also shop at Target on the same day, and even which restaurants draw office workers at lunch versus residents at dinner.

Geo-location data has become much more than an interesting curiosity, it’s become a very important part of leasing strategy. We’re using trade area data and demographics of actual customer visits to match the right tenant with those customers. The more surety a tenant has that their desired customer is visiting our property, the more rent they are willing to pay to have access to those customers. I think the reduction of risk for a tenant due to data availability is going to produce higher rent growth for SITE Centers going-forward.

The Shops at Midtown Miami. Photo courtesy SITE Centers.

How is the continued proliferation of e-commerce impacting your business model?

For at least the last 10 years, there’s been a looming dark cloud over brick-and-mortar retail as landlords wondered what the long-term effect of e-commerce would have on physical property operations and values. Like many investors, we gave a lot of thought to defensive moats that we could build around our properties, such as leasing to service providers or retailers with business models that aren’t easily replicated online.

As it turns out, COVID has proved that moats were less important than bridges. We quickly became a natural connection to neighborhood customers as we are quite literally the most convenient method and cost-effective distribution of goods and services to suburban communities and our tenants are recognizing this fact by growing their footprint at our properties. You might be surprised to learn that of the top 10 largest e-commerce retailers in the United States, nine are current tenants of SITE Centers.

What initiative at SITE Centers are you currently most excited about this year?

Ownership of our industry is getting much more sophisticated and institutional. One of the opportunities we see is in sustainability as it relates to improvements in technology. Shopping centers are simple buildings and they have an antiquated system with respect to energy. The tenants generally pay utility companies directly for their power consumption but we, the landlord, install and usually own the rooftop mechanical units.

Energy use and management is highly inefficient in shopping centers and is ripe for disruption. If you consider the impact that Nest style thermostats have had on single-family homes, imagine the possibilities with remote control and monitoring of energy for commercial retail properties. After all, 40% of carbon emissions in the U.S. are from buildings and 90% of the electric load is from heating, cooling, and lighting. We’re implementing remote IoT (Internet of Things) controls at our properties and are projecting a meaningful reduction in carbon output as a result.

What should shareholders expect to see from your company over the next three years?

External growth. Our current leasing activity is so strong that we’ll simply run low on leasable inventory in the next year and the capital we’re spending on leasing today will shift to external investments in acquiring new properties.

The fact is that convenience properties in wealthy suburbs are experiencing a sort of renaissance due to population trends and I expect us to invest into these trends with the data we see on rent growth and customer activity.

Are there any disruptive technologies that will impact shopping centers in the future?

I don’t see changes in the desirability of the suburbs, but I do see changes to the automobile having an interesting impact.

We formed a pilot program three years ago with Waymo, Google’s autonomous vehicle division, to study the possibilities of the technology at one of our large properties in Arizona. The pandemic forced a very fast adoption of both customers and retailers using the store as a successful last-mile fulfillment center and I’d expect an eventual rollout of driverless cars to offer even more opportunities. Convenience centers may actually become even more convenient.

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EastGroup Properties Shines as the Sun Belt's Last-Mile Leader

Kyle Gustafson — Wed, 07 Apr 2021 17:05:38 +0000

EastGroup Properties Shines as the Sun Belt's Last-Mile Leader Kyle Gustafson Apr. 7 2021

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

EastGroup Properties is meeting the growing need for smaller industrial distribution facilities located close to consumers across the Sun Belt.

Last-Mile Leader

EastGroup Properties is meeting the growing need for smaller industrial distribution facilities located close to consumers across the Sun Belt.

Marshall Loeb, president and CEO of EastGroup Properties

When it comes to industrial real estate, EastGroup Properties Inc. (NYSE: EGP) has operated under a simple mantra in its 30 years as a public company: bigger isn’t always better. The REIT has honed its strategy in favor of smaller warehouse buildings located closer to consumers in markets across the Sun Belt.

EastGroup’s properties are more akin to attractive office parks than typical warehouse space, and instead of focusing on a handful of prominent tenants, the REIT rents to a wide variety of businesses that may need just 15,000 or so square feet.

“Our customers typically serve a local, growing metro area,” says Marshall Loeb, EastGroup’s president and CEO. “As a result, our ‘last-mile’ locations are often irreplaceable as cities grow and our customer pool continues to grow and diversify.”

The company is also benefiting from shifting demographics as consumers exit coastal cities. “EastGroup’s focus on smaller warehouse buildings has made it uniquely sensitive to local market economies, which should work in their favor as we continue to see strong migration trends towards the Southeast and Sun Belt markets,” says Blaine Heck, a senior equity research analyst with Wells Fargo.

The company’s strategy has resonated with investors, as EastGroup’s market capitalization has soared from $2.8 billion in early 2016 to roughly $6.8 billion today. Meanwhile, the dividend has been increased or maintained for 28 consecutive years, with increases in each of the last nine, according to the company. “We have a market-tested strategy and management team,” Loeb says.

‘Secret Sauce’

The company, once known as Third ICM Realty, traces its roots back to 1969. The EastGroup name was adopted when the current management assumed control in 1983. Four public REITs have been merged into or acquired by EastGroup: Eastover Corp. in 1994; LNH REIT Inc. and Copley Properties Inc. in 1996; and Meridian Point Realty Trust VIII in 1998.

Throughout its growth over the years, the company’s business model has remained intact. “Their secret sauce is down pat,” says Alex Goldfarb, REIT analyst with Piper Sandler. “They’ve just become phenomenal at it.”

Today, the portfolio includes approximately 47 million square feet in 13 of the 15 fastest-growing major Sun Belt markets. EastGroup focuses on local economies that are growing faster than the broader U.S. economy and are better positioned to handle the ups and downs of economic cycles.

Gateway Commerce Center, Miami Gardens, Florida

Most of EastGroup’s properties are industrial facilities known as “shallow bay” that support distribution, light manufacturing, and last-mile logistics. Some tenants have office space on site. The company prefers to operate a model somewhat similar to building out a residential development.

“We like developing a whole park. We’ll build two buildings and as those lease up, we’ll then break ground on one or two more,” Loeb explains. “The market demand pulls the supply rather than the company feeding supply into the market. This dramatically reduces our development risk.”

As EastGroup nears critical mass in a park, original tenants may need to move to a larger space, creating an opening for a new tenant paying higher rent. And, “as we complete the park, our ability to control the tenancy, the architectural design, and the landscaping creates a real sense of place,” Loeb says.

E-commerce and Covid

While e-commerce has grown dramatically in recent years, pushing companies to focus on having distribution as close to consumers as possible—EastGroup’s exact niche—the COVID-19 pandemic only increased the demand. “COVID has actually accelerated the EastGroup model in a variety of ways that will play out over the next several years,” Loeb says.

What’s more, the shift to work from home has accelerated population movement to the Sun Belt markets, pushing companies to follow, Loeb says. Meanwhile, “we’ve begun seeing companies carry more ‘safety stock’ inventory to avoid the shortages they had during COVID,” he adds. “That shift leads to increased square footage.”

Still, there has been some concern amongst investors that EastGroup’s portfolio of warehouses, which has a smaller average building size than its peers in the industrial REIT sector, could be more exposed to small businesses that are struggling to make it through the pandemic, Heck says. For now, “their rent collections have been strong,” he notes.

ParkView Commerce Center,Flower Mound, Texas

Hottest Markets “Rotate”

Today, more than one third of EastGroup’s net income comes from Texas, where it has properties in El Paso, Dallas, Austin, San Antonio, and Houston. The latter is its largest market in the state.

Some analysts think the company found itself overexposed to Texas when the price of oil plummeted in 2014, causing it to sell some properties. “In the past, EastGroup’s high exposure to the Houston market has been a disadvantage, but the company has done a great job of diversifying away from Houston through dispositions and additional investment in other Sun Belt markets,” Heck says.

Michael Carroll, a director at RBC Capital Markets, adds that “we were previously concerned EastGroup could face near-term disruption due to its tenant roster being largely comprised of smaller companies and the higher exposure to Houston. However, these potential issues appear modest and manageable.”

The Houston exposure peaked at roughly 21% of rents in 2015 and will be “just above 12%, and falling, this year,” Loeb says.

When measuring the portfolio, the Lone Star state is followed by Florida, where the largest concentration in terms of square feet is Tampa. Other Sunshine State cities include Orlando, Miami, and Jacksonville. The REIT also has properties in California: San Francisco, Los Angeles, Fresno, and San Diego; Arizona: Phoenix and Tucson; as well as in Charlotte, North Carolina, Denver, New Orleans, and Las Vegas. The hottest markets rotate, but “today we’d say they are Dallas, Austin, Los Angeles, and San Francisco,” Loeb says.

The company is a relative newcomer to the Atlanta market, where it owns properties including the 195,000-square-foot Broadmoor Commerce Park and the 238,000-square-foot Shiloh 400 Business Center. It is also a newer player in Greenville-Spartanburg, South Carolina, located approximately halfway between Atlanta and Charlotte along the fast-growing I-85 corridor. When it comes to new markets, “none are pressing, but Nashville is a market we’ve discussed over the years,” Loeb says. “Maybe one day.”

Dave Rodgers, a senior research analyst at Robert W. Baird & Co., trusts Loeb to do that at the right time. “A lot of companies make acquisitions that have taken them all over the map,” he says, whereas EastGroup has “stayed very disciplined.”

Kyrene 202 Business Park,Chandler, Arizona

Tenant Diversification

EastGroup focuses on players that include food and beverage distributors, commercial and residential construction, service companies, third party logistics firms, and medical suppliers that need a smaller space closer to denser populations. “One misconception of us is that small spaces mean local companies, which isn’t true,” Loeb points out.

The company’s largest tenants include the U.S. Postal Service, with about 1% of the portfolio across five markets, and Mattress Firm Inc., with less than 1% in four markets. Most of its tenants take between 15,000 and 70,000 square feet, and its top 10 customers represent less than 10% of its annualized base rent, protecting it should a tenant or two encounter business issues or enter bankruptcy protection.

Like most REITs, EastGroup has answered investors’ increased demands for ESG investment and reporting. Some 80% of properties have skylights and/or LED lighting, while seven out of 10 have white reflective roofing. The company also has 25 properties that have received LEED certification by the U.S. Green Building Council. However, this isn’t a recent passion, Loeb says.

“As ESG has risen in prominence, we’ve learned to document and report much of what we were already doing, but people weren’t directly asking about,” Loeb says. “We recently published our second annual ESG report, and it remains a key focus for 2021. We will continue to take a lot of steps, big and small, that enhance our ESG standing,” he adds.

“Any Number of Tailwinds”

Heck thinks this year will be a good one for the company. “In 2021, we expect EastGroup to continue to show solid rent growth through in-place annual escalators and increasing rents on expiring leases,” he says, adding that occupancy will likely remain steady near historical highs. “We’ll be focused on EastGroup’s ability to continue to invest in its development pipeline as a source of growth and value creation throughout the year,” he adds.

For his part, Loeb is excited about the company’s future. “EastGroup has any number of tailwinds that we’ll benefit from at different speeds at different times,” he says. “Compared to some other real estate sectors, I’m excited about where we go from here.”

Remembering EastGroup Founder Leland Speed

Leland Speed, chairman emeritus of EastGroup’s board of directors

Leland Speed, chairman emeritus of EastGroup’s board of directors and a director of the company, died in January at the age of 88. Speed was the company’s founder and served as CEO until 1997. His service as a director began in 1978; he served as the chairman of the board from 1983 to 2015 and then as chairman emeritus until the time of his death. Speed was also the recipient of the 2008 Nareit Industry Leadership Award.

Loeb notes that Speed’s real estate knowledge and expertise were instrumental to the growth of the company.

“His leadership and ‘healthy, wealthy, wise’ philosophy were the capstone for our positive culture. From my internship to today, he made EastGroup feel like family, and he could often be found in conversations with employees about a variety of topics, from company history to personal wellbeing and ways to make positive impacts in our communities,” Loeb says.

“Speed was a positive thinker, loved real estate, and he brought positive energy to all he encountered. He would often speak fondly of his family, and he loved telling stories about his grandchildren,” Loeb says. He adds that Speed’s legacy will live on within the company and the Jackson, Mississippi community.

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New CyrusOne CEO Bruce Duncan Brings a Fresh Vision

Kyle Gustafson — Mon, 08 Feb 2021 19:12:59 +0000

New CyrusOne CEO Bruce Duncan Brings a Fresh Vision Kyle Gustafson Feb. 8 2021

Dawn Wotapka

publications@nareit.com

Dawn Wotapka is a freelance writer and regular contributor to REIT magazine.

CyrusOne CEO Bruce Duncan brings decades of experience to a REIT with global ambitions.

Fresh Vision

CyrusOne CEO Bruce Duncan brings decades of experience to a REIT with global ambitions.

Bruce Duncan, President and CEO of Cyrus One

When CyrusOne Inc. (Nasdaq: CONE) selected Bruce Duncan as president and CEO last summer, the data center industry outsider brought with him an extensive commercial real estate record—spanning more than four decades and multiple sectors—that the REIT considered key for its continued growth and international expansion.

During his career, Duncan has served as CEO and director of multiple public companies including: Cadillac Fairview Corp.; Equity Residential (NYSE: EQR); Starwood Hotels & Resorts Worldwide, Inc.; and First Industrial Realty Trust, Inc. (NYSE: FR).

CyrusOne, however, marks a new chapter for Duncan. The Dallas-based REIT, which began trading on the Nasdaq Exchange in 2013, has a market capitalization topping $8 billion. The company builds and operates data center facilities across the United States, Europe, and Asia, and counts among its customers 200 of the Fortune 1000 companies and nearly half of the Fortune 20. Enterprise and hyperscale customers each account for approximately half of the business, with a tenant roster spread across sectors including information technology, financial services, health care, and consumer staples.

Duncan spoke with REIT magazine on a range of issues including his background, the challenges and opportunities facing CyrusOne today, and the importance of mentorship.

How has the variety of your background equipped you to lead CyrusOne?

I have been very fortunate to have had the opportunity to be CEO of five publicly traded companies—all in different product types—as well as director of some others, which has given me a broad perspective.

My background in real estate investment, development, and management, both domestically and internationally, fits well with CyrusOne’s organic growth plan to create value through our strong development platform in the U.S. and Europe. I have also been privileged to have worked with some incredibly smart, capable, dedicated, and truly wonderful teammates throughout my career and have learned a lot from them and those experiences.

Is there a company on your resume that you think best prepared you for your current role?

I think that they all were additive to my development as a leader, manager, and investor. However, I would add that my experience as CEO of First Industrial Realty Trust has locational similarities to, and customer overlap, with CyrusOne and the data center industry more broadly.

What has surprised you about leading this company?

I wouldn’t necessarily say it’s a surprise, but you don’t know about the quality of the people you have until you meet with them. Over the last few months, I have toured our facilities throughout the U.S. and Europe and spent a lot of time getting to know our people, and we have an outstanding team.

Our people are smart, work hard, want to win, and are very focused on taking care of our customers. When you have great assets and a great team, you are in a strong position to create value for your shareholders.

What is a key change that’s occured in commercial real estate during your career?

Like many industries, technology has digitally disrupted the commercial real estate sector. Front and center is the impact e-commerce has had on traditional brick and mortar retail. Technology certainly hurt the regional mall business since retailers can get to their customers much more efficiently over the internet.

While high end retailers will still want and need stores in high quality malls to showcase their products, they will focus their efforts on the top 15%-20% of centers around the world. On the other hand, the e-commerce boom has been very beneficial to the industrial warehouse sector.

Technology has also had a major impact on the hospitality business. Technology now allows customers to have instant access to pricing, options, and information. Would anyone have predicted 10 years ago that an upstart with virtually no physical locations, Airbnb, would have a higher market cap than both Marriott and Hilton combined?

Technology is not going away, and business leaders need to make the necessary strategic investments to pivot their organizations for the new reality of our interconnected economy.

Who gets the most credit for shaping you as a leader?

That would be my parents. They taught me the value of hard work and being straightforward as well as the importance of treating people with respect and dignity.

Pandemic aside, what is the biggest challenge CyrusOne faces today?

Ensuring that we’re positioned to meet the needs of our customers in the markets in which they need capacity. Our hyperscale customers continue to grow very quickly and are increasing their deployment sizes, so we’re focused on being able to accommodate their requirements, particularly as they expand throughout Europe.

Our hyperscale clients also have a difficult time with capacity planning because it’s very difficult for them to forecast demand. It’s a major challenge and opportunity for providers to be positioned with capacity in the right markets and quantities to meet their timing requirements.

Has the pandemic reshaped your company?

I don’t know that the pandemic has significantly reshaped our company, but it has highlighted the critical role that data centers play in supporting the global economy, enabling collaboration technologies, work from home solutions, remote learning, and facilitating an acceleration in e-commerce.

As we consider what the world will look like in the future, it’s clear that there will be an increased reliance on technology, which will create additional demand for space and power in data centers.

Where do you see this company in five to 10 years?

Given the secular demand drivers in this industry and the resulting opportunities for growth, I expect us to be a much bigger company. We will also have a much larger international footprint, particularly given the growth in Europe. Our international business currently accounts for less than 10% of our revenue, and I anticipate that percentage will be significantly higher in the next five to 10 years.

Where do you see the most room for growth?

We see tremendous growth potential in Europe and have worked hard to position the company to be successful in those markets. We also continue to see significant growth from our hyperscale customers, and while they currently account for approximately half of our revenue, I anticipate that percentage will continue to increase meaningfully over time.

What makes CyrusOne unique in its sector?

Our core competency is in developing data centers, and we have the ability to deliver large amounts of capacity quickly in the key markets that our customers want to be in, with flexible solutions to meet their specific needs.

Our track record of building and delivering scale in accelerated time frames has been a key reason for our success with hyperscale companies. We also have a deep and experienced sales team, and the vast majority of our leases are sourced through this channel rather than through brokers. We had established relationships with many of our enterprise customers years before they signed their first lease with us.

CyrusOne released its inaugural sustainability report on your watch. What is the company’s commitment to ESG worldwide?

We have undertaken many initiatives in recent years in support of sustainability objectives, including operating on 100% renewable energy in London and Amsterdam and creating a net-positive water solution in Phoenix.

ESG is not only a company-wide priority but it is also very important for all of our stakeholders, including our customers, our investors, and our vendors, and it was important to us to formalize this commitment.

Our initial sustainability report highlights our progress toward sustainability goals, anchored by our Zero Carbon by 2040 pledge, as well as our commitment to a diverse and inclusive workplace, and the alignment of internal incentives with the goals and objectives of our stakeholders.

How are REITs positioned to adapt and thrive in the years ahead?

REITs are well-positioned to continue to thrive due to the industry’s outstanding job over the last 30 years. Back then, no one knew what a REIT was, and we didn’t have a track record. Today, we have a long track record of providing our investors with very good risk-adjusted returns compared to investments in other industries or asset classes. Our job collectively is to continue to do an excellent job for our investors and continually work to enhance our corporate governance.

What are some of the ingredients of a winning management team?

In my experience, winning teams have an owner’s mentality, a shared vision and mission, and a “whatever it takes” attitude to take care of their customers, their shareholders, and their people. They lock arms, work hard together, have fun together, and focus on achieving the goal.

Have have you seen the mood shift with regard to the importance of diversity within the real estate sector?

Commercial real estate has been behind on this issue compared to other sectors, and while progress has been made, there is much work we all must do. Diversity and inclusion are a bedrock principle of our company culture. Every day, we all strive to respect each other and the value that each of us brings in our different opinions and views.

What advice would you give to a college student who wants to run a REIT someday?

I would encourage them to try to get the broadest experience they can with a number of different product types. This will help them figure out where their interests lie and what they are good at.

If possible, get involved with a leading company that has smart people and is a good training ground. And, find a mentor—someone who has been successful and has good judgment and can be a sounding board as you go through life. It is very helpful to have someone who has been there and done that, to talk through life and business issues as they come up—and they will.

When it comes to fun, what are you good at?

I am truly the world’s worst golfer, but I have fun playing it if I am with my friends as we have constant banter. My lip wedge is my best club. I enjoy competition of any sorts as I love the camaraderie it brings. I am a great believer that we only have one life and we need to live it to the fullest, and have fun and enjoy each and every day.

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