REITs have made the most of market conditions since 2008 to better their fortunes. They’ve received favorable treatment from capital markets that have access to both equity and debt. REIT share prices have regained much of the ground lost after the 2008 financial crisis. And firms with strong balance sheets have gone on the offensive in right-sizing their portfolios and refocusing on core assets.
NREI caught up with five REIT CEOs to learn more about their strategies, what they see as their greatest opportunities and what keeps them up at night.
Monty J. Bennett is founder, director and CEO of Ashford Hospitality Trust Inc. Bennett has held his current positions since Ashford’s formation in August 2003. Under his leadership, Ashford has amassed more than $4 billion in assets and has outperformed its peer average in total shareholder returns on a trailing basis consistently over the past eight years.
Debra A. Cafaro is chairman and CEO of Ventas Inc. She has served as Ventas’ CEO since 1999 and as chairman of the board of directors since 2003. Under her leadership Ventas’ market capitalization rose to $17 billion in 2012 from less than $200 million in 1999.
Richard Campo is chairman and CEO of Camden Property Trust. He co-founded Camden’s predecessor companies in 1982. He has held his current position since May 1993. Under his leadership, Camden has grown from a Texas-based real estate firm with assets valued at $200 million to a national owner with assets valued at more than $8 billion.
David B. Henry is vice chairman, president and CEO of Kimco Realty Corp. In his current role, Henry is responsible for Kimco’s overall strategic execution, overseeing North America’s largest portfolio of neighborhood and community shopping centers. He joined Kimco after 23 years at General Electric where he was chief investment officer of GE Capital Real Estate.
Dennis D. Oklak is chairman and CEO of Duke Realty Corp. He serves as head of Duke’s executive committee, overseeing the strategic direction of the company and its investment committee, with responsibility for approving major capital transactions. He joined Duke Realty in 1986 and became CEO in April 2004.
NREI: There seems to be plenty of investor demand for REIT equity and debt. How has this influenced your financial and balance sheet management decisions?
Bennett: We’ve taken advantage of the availability of capital in both the debt and equity markets. We successfully refinanced $370 million of debt since December 2011 and have also utilized our preferred equity at-the-market issuance (ATM) facility. We also have a common-equity ATM facility available to us, and we’re currently in the market trying to refinance a few loans.
We think it is advantageous to build liquidity over time in order to take advantage of opportunities as they arise, and to provide security, should another downturn occur. Building up our cash balance is a goal of ours, and we believe it will give us great flexibility in the future. At the end of the second quarter we had a cash balance of $139 million as well as an undrawn $145 million credit facility.
Cafaro: The equity markets are strong and the bond market is hot, fueled by incredible demand, which I believe is the result of the thirst for yield. It is a robust trend that has been building for awhile and shows no signs of abating. We pay very close attention to risk management and are committed to maintaining a fortress balance sheet.
Capital-raising is one of the things we aim to be really good at; hitting the right market at the right time is a key objective. Additionally, we are consistently working to improve our cost of capital. Essentially, Ventas is built around the concepts of reliable cash flows, a fortress balance sheet, staggered maturities, more than adequate liquidity and a diversified business model.
Campo: Camden has taken advantage of the capital markets and has issued $700 million in new common equity during 2012, bringing total equity issuance to $1.3 billion. In addition, we completed $500 million of new 10-year and 12-year unsecured debt. The capital has been used to fund development, acquisitions and debt reduction.
Henry: The current 10-year-rate environment has allowed us to refinance some of our higher-rate preferred stock and maturing debt at much lower rates. As an example, this year we redeemed two classes of our preferred stock that was callable with coupons of 7.75 percent on $460 million and 6.65 percent on $175 million, respectively, and issued two new classes of preferred stock in the amount of $400 million at 6.00 percent and $225 million at 5.50 percent that will provide an annual savings of approximately $12 million.
We also have been successful in replacing several unsecured bonds that were scheduled to mature during the latter half of 2012 and early part of 2013 by prefunding these with a new $400 million unsecured bank loan priced at 105 basis points over LIBOR for a five-year term.
Oklak: We have accessed the public markets regularly over the past year. We have raised common equity through our ATM program. We also have issued unsecured debt in the public market. The proceeds of these offerings have been used to repay maturing debt, redeem some higher-coupon preferred stock and fund growth in our company though acquisitions and dispositions. On a strategic basis, we continue to de-lever our balance sheet.
NREI: Commercial property valuations have rebounded somewhat, but investment sales volume is still weak. What’s your take on the acquisition environment? How active has your REIT been?
Bennett: We have been very active in scouring the markets, both domestic and international, for acquisition opportunities. Sales volume has not been tremendously high, but there are still deals getting done. A transaction for just a single property generally doesn’t move the needle enough for a platform of our size. Typically what we’re most interested in is a portfolio that we feel we’re acquiring at a substantial discount, such as the Highland portfolio we acquired in 2011.
With pricing where it is today, we’re just not seeing those opportunities right now. We’re also actively looking at international markets, primarily gateway European markets, but we’re being very cautious and don’t yet believe it’s the right time to invest.
Cafaro: Since 2011 Ventas has closed $12.6 billion in acquisitions. As we look ahead, we see a strong pipeline with deals of many different sizes. So far this year we have completed $1.6 billion of transactions from large and small deals.
Of course, it’s not a just a question of what is available to buy, but also a question of quality and price. Our acquisitions have to make sense from a strategic, financial and risk management point of view.
Campo: We have acquired nearly one billion dollars’ worth of properties in the last 18 months. The multifamily acquisition environment is very competitive and probably the most robust sector in all of real estate. Pricing for acquisitions has increased to 2007 levels as cap rates have compressed and cash flows have risen, making development more attractive. Camden has an $800 million development pipeline, and we will add $250 million to $300 million annually.
Henry: There is a wide cap-rate disparity between the value placed on class-A shopping centers versus that on the class-B and class-C assets. The acquisition environment for the best class-A properties is extremely competitive, and most of our success over the course of the past two years has been to acquire properties through negotiated off-market transactions. We have acquired 12 properties in 2012, totaling approximately $360 million.
Oklak: We have been quite active on the acquisition front over the past two years. All our acquisitions have been bulk industrial buildings or medical office properties. Overall, the market for acquisitions has been slower in 2012 than in the previous couple of years. I would attribute this to investors wanting to hang on to their quality real estate to provide cash flow in this low-interest-rate environment.
NREI: What is the biggest challenge that REITs face today? Is it the same for your REIT?
Bennett: The biggest challenge facing REITs today is the uncertain economy. We continue to move along at low growth rates, much lower than one would expect coming out of such a severe downturn. Jobs continue to be a drag on business.
Even though the unemployment rate ticks down a little, unemployment remains high and when it does go down, it’s primarily the result of people leaving the workforce because they haven’t been able to find a job. The policies that have been enacted by our government have not been successful in addressing the employment situation.
Cafaro: Economic uncertainty and political risk can have enormous impact on the function of capital markets, which are the lifeblood of REITs and the real estate market generally. The debt ceiling, the fiscal cliff, “taxmeggedon” and tax reform, as well as concerns about Greece, China and the Middle East can be drags on the markets.
In many respects, because our business is need based and demographically driven, we are less sensitive to economic downturns compared with other REITs or corporations that are more directly affected by global and domestic economic uncertainty.
Campo: The biggest challenge REITs face today is the same challenge that any other business faces: the uncertain economic and policy environment. It is very hard to make long-term decisions in such an uncertain environment.
Henry: The biggest challenge that REITs face today is more on the macro level and has to do with the uncertain economic climate, which has impacted both job growth and consumer sentiment. This, in turn, has a direct impact on retailers and our strip-center business. In terms of the strip-center sector, some of issues we are dealing with have to do with some retailers looking to downsize their square footage and the continuing struggle of the true mom and pop shop space.
Oklak: I believe the challenges differ somewhat by product type. For Duke Realty, the biggest challenge is to generate profitable growth in a sluggish economy with limited development opportunities. We are using our expertise in industrial build-to-suit and medical office development to overcome this challenge.
NREI: How has the upcoming presidential election impacted your business?
Bennett: With all of our D.C. exposure, election years are usually a slight negative for us. It’s been a weaker year in D.C., but we still view it as a very strong market over the long-term. We think we’ll see improved performance after the election.
Cafaro: The election has little to do with Ventas’ business, but the uncertainty it creates affects the economy and business in general. It is difficult to plan and invest. But, I believe that uncertainty is the new normal. Both parties will have to deal with entitlement reform and the deficit. Deficit reduction—whether in the form of increased revenues or spending cuts—will likely prove anti-growth. While the markets have been strong, we will have to wait and see how they react once the election is over.
Campo: The upcoming election has no impact on our business, but uncertainty relating to future taxation and policy negatively impacts decisions making process today.
Henry: The shopping center business is predicated on consumer confidence and job growth. When people are feeling good about their job and stability of their paycheck, it is a catalyst for spending which is a good thing for retailers that are our customers. However, our nation continues to face some challenging uncertain economic conditions which make this a hurdle – the looming fiscal cliff that faces the American taxpayer is one example. At some point, Congress will need to do something to address this, but it will probably be a last minute compromise.
Oklak: Many of our customers are holding back on making decisions to expand their businesses in the current political environment. This includes the upcoming presidential and congressional elections as well as the issues related to the fiscal cliff at the end of this year. We really need some consistency in direction from Washington, D.C. and support for the business community in general, which isn’t there today.
NREI: We’ve seen a lot of REITs divest of non-core assets in recent months. Is this an objective for your REIT?
Bennett: In general we prefer franchised, full-service assets. There also can be great assets that don’t fit these criteria but that would be accretive assets to own. For us, it primarily comes down to when is the best time to buy and sell.
Cafaro: We have a diversified balanced business model and don’t have any assets or business lines we consider non-core. But we do look for opportunities to be thoughtful and rigorous capital recyclers. We intend to continue executing on our articulated strategy of selectively divesting of assets to improve our portfolio and redeploy capital into other attractive opportunities.
Campo: Camden has been recycling capital from slower-growing assets into higher-quality fast-growing assets for the last 20 years. We will continue to recycle our portfolio.
Henry: We have a nonstrategic group of shopping center assets that we are looking to sell as a means of actively refreshing our portfolio. This has been part of our strategy for about two years to sell those assets that either no longer fit our targeted demographic profile, lack the proper tenant mix or fall outside our core markets and using the proceeds to acquire better quality assets in our core markets.
Additionally, we are also selling a pool of non-retail assets that fall outside of our core competency of owning and operating neighborhood and community shopping centers. These non-retail assets total approximately $460 million today compared to approximately $1.2 billion at the beginning of 2009.
Oklak: Over the last three years or so, we have repositioned our portfolio to reduce our investment in suburban office properties and increase our ownership of bulk industrial and medical office properties. As part of this, we have disposed of a significant number of suburban office assets, including our $1 billion sale to Blackstone in late 2011. This is still an ongoing process, and we are actively marketing nonstrategic assets today.
NREI: M&A activity in the REIT space seems to be heating up. What are your thoughts on M&A opportunities and the motivation behind it today?
Bennett: There hasn’t been recent M&A activity in the lodging REIT space, but we think opportunities always exist. There may be opportunities to create shareholder value through G&A reduction, or through improved asset management. As we move along in the cycle, maybe we’ll see lodging REITs start to look more closely at M&A deals.
Cafaro: Healthcare REIT merger/acquisition activity has been robust for about two years. Our acquisitions have approached $13 billion in since 2011, which is consistent with our strategic objective of growth and diversification. We have been a leader in the active healthcare REIT sector, and we will continue to play that role as consolidation in the $1 trillion healthcare real estate market continues. We see opportunities from owners and operators of healthcare and seniors housing that are seeking ways to monetize assets and redeploy capital into their core business of providing care; selling their real estate is one way to accomplish that goal.
Campo: M&A activity in the multifamily space has been very limited. Social issues with existing management tend to limit M&A opportunities. For example, management teams do not want to merge because they would lose their jobs/power base. Some people call this management entrenchment. We would consider M&A only if we could increase our earnings and net asset per share or strategically improve our portfolio.
Henry: I don’t believe there will be widespread consolidation in our sector. Many of the public REITs that have weathered the economic crisis are now looking to move ahead. There’s not that motivation to sell right now. More importantly, I don’t think most companies’ boards of directors will allow them to sell the company at their current valuations considering where they were a couple years ago.
Oklak: Today bigger appears to be better in the REIT world, and I believe this is driving some of this activity. Larger companies generally have better access to and a lower cost of capital. I believe this is a trend that will continue.
NREI: Looking forward to 2013, how do you expect your strategy to change?
Bennett: We have a track record of creating shareholder value throughout all parts of the lodging cycle, so our strategy will be highly dependent on where we think we are in the cycle. As we move into next year, if things keep progressing as they are currently, we’ll probably be about midway through the cycle.
So there may still be domestic acquisition deals that look attractive. We’ll also continue to closely monitor the situation in Europe, as there may be opportunities to acquire assets at favorable pricing. Also as previously mentioned, a stated goal of ours is to build up a cash balance that would provide us with liquidity, flexibility, and allow us to take advantage of accretive opportunities as they arise.
Cafaro: Our strategy has been transparent and consistent: build a diversified portfolio of high-quality, cash-flowing healthcare and seniors housing properties; focus on the private pay portion of the business; invest where there is significant demand from demographic trends; grow cash flows, the dividend and net asset value and thereby deliver consistent superior total returns to shareholders.
We have a flexible business model that allows us to allocate capital to different subsectors and that has enabled us to put good growth numbers on the board for a long time. For instance, we have identified seniors housing and MOBs as two key areas for growth—driven by changes in the healthcare landscape and an aging population—and that emphasis will continue.
Campo: Our strategy will not change in 2013. We are focused on increasing cash flow, net asset value and improving our portfolio while maintaining a strong balance sheet.
Henry: Our strategy remains being committed to the owning and operating of neighborhood and community shopping centers. We think this is the right strategy for us and want to continue its execution, which includes improving the quality of our portfolio through the sale of our nonstrategic shopping centers, finding value creation opportunities through redevelopment of our existing assets as well as acquiring high- quality properties in our core markets that provide growth opportunities and the right tenant mix. At the same time, we will strive to maintain a strong balance sheet with ample liquidity punctuated by an investment-grade credit rating.
Oklak: Our strategy is in place for 2013 and will be similar to the last two years. We will finalize the repositioning of our portfolio to be 60 percent bulk industrial, 25 percent suburban office and 15 percent medical office with likely overall growth in our company. We will be focused on new development of bulk industrial facilities and medical office buildings. We will be active in both the acquisition and disposition markets and continue to take advantage of the favorable capital markets to de-lever our balance sheet.