While most commercial banks and private equity funds are taking a breather from investing in the real estate markets, some of the country’s top institutional players are partnering with real estate investment trusts (REITs) to keep deals churning.
“There are definitely more REIT joint ventures happening now,” says Alan Pontius, managing director of the office and industrial properties group with Marcus & Millichap in San Francisco. “The REITs were having a difficult time competing with private equity shops and pension fund advisors on price.”
Both REITs and institutional investors are under constant pressure to put their capital to work. REITs have fewer financing alternatives given the tight credit markets, while pension fund and insurance investors are venturing further afield — into mezzanine debt, for example — to generate their target returns.
Joint ventures give REITs many advantages, including a steady revenue stream thanks to the management fee income generated through institutional partnerships. “While the institution might enjoy the benefits of having an experienced property management team on hand, the REIT will also enjoy the benefits of a continued stream of income from managing these assets,” says Jason Lail, senior research analyst with Charlottesville, Va.-based SNL Financial. “The REITs will enjoy this revenue stream while reducing exposure to 100% of the debt and costs involved with operating that property, so the REIT leverages its expertise rather than its balance sheet.”
Pontius agrees. “Oftentimes the institution prefers to have operating expertise on the ground at the property level and certain of these REITs are able to deliver that.”
Partnering with REITs also gives institutions increased deal sourcing and operational stability. “Institutional investors as a whole enjoy a higher level of asset quality when investing with a REIT versus many other forms of commercial real estate investment,” notes Lail.
Typical of today’s crop of joint venture arrangements was a deal struck in late January. Dallas-based Ashford Hospitality Trust and Prudential Real Estate Investors are investing up to $400 million over the next two years to acquire or originate loans and preferred equity. Target properties include full-service hotels and resorts in upper-upscale to luxury segments and branded select-service hotels in upscale and mid-scale segments, along with extended stay and economy assets. Ashford is contributing $100 million to the joint venture, while Prudential will manage the fund, hoping to raise around $300 million.
"The ability to leverage the Ashford team’s proven expertise in underwriting and sourcing hotel debt is very compelling for us,” says James P. Walker, a principal at Prudential. “The displacement in today’s credit markets has created a unique opportunity to fill in the gap for many hotel borrowers and lenders.”
Thanks to the continued sluggish economy and subprime woes hitting the balance sheets of both Main Street and Wall Street financial firms, Pontius looks for more REIT joint ventures to come. “I definitely think the trend won’t slow down because it is a way to get the capital deployed and improve the return because of the leverage factor.”