Why REITs Plan on Being Big Net Sellers in 2016
An in depth analysis of 2016 acquisition and disposition activity for 2016 reveals that the majority of America’s publicly traded REITs and real estate businesses are looking forward to making big profits in property sales this year, it is estimated by experts that the total of property dispositions will more than double that of acquisitions.
What may be even more interesting to investors is the prediction that three times as many REITs are expected to become net sellers compared to net buyers in 2016.
A large percentage of publicly traded REITs and real estate investors have released their year-end and fourth quarter earnings along with outlines of their guidelines for 2016.
According to CoStar’s initial investigation into 80 such reports, it appears that more investors are attempting to fund their acquisition, development and redevelopment projects through investment property sales.
Not every company provides full 2016 guidance; however, approximately 50% of the publicly traded equity REITs have made this information available so far. According to businesses that have reported, they foresee selling just over $20.7 billion in properties in stark contrast to $9.8 billion in estimated acquisitions.
Sam Zell’s Equity Residential is easily one of the country’s most successful net-sellers. The multifamily REIT has projected that it will close $7.4 billion in properties during the coming year, an estimated one third of the aggregated total disclosed by REITs so far. Equity Residential claims that it plans to purchase $600 million in property investments by the high end of its 2016 guidance projections.
A large portion of that sell-off for the year has already taken place. In January, the company closed the sale of 72 holdings comprised of 23,262 apartment units to associates of Starwood Capital Group for $5.3 billion, or an average of $230,634 per apartment.
Coming to the conclusion to sell such a vast allotment of its $23 billion in assets speaks volumes of the challenge the REIT perceived in attempting to recycle $6 billion of capital in the current marketplace with prices spiking due to competition from private equity and institutional investors.
The REIT intends to use the selloff this year to reorganize their portfolio to reflect higher density urban environments located in close proximity to transportation and community job centers. Equity Residential is currently developing 10 separate properties equaling nearly 4,000 units to the tune of about $2 billion.
Development and redevelopment expenditures are of paramount importance for the top five projected net sellers of investment properties.
Top Five Projected Net Sellers
“Company — 2016 Acquisition Guidance — 2016 Disposition Guidance — Difference
Equity Residential — $600,000,000 — $7,400,000,000 — -$6,800,000,000
Prologis — $700,000,000 — $2,200,000,000 — -$1,500,000,000
Liberty Property Trust — $100,000,000 — $1,200,000,000 — -$1,100,000,000
Brandywine Realty Trust — $0 — $850,000,000 — -$850,000,000
Macerich Co. — $330,000,000 — $1,054,000,000 — -$724,000,000
Prologis has $2 billion of properties under development totaling 25.5 million square feet.” [Original figures compiled by Mark Heschmeyer]
In this last fourth quarter, Liberty Property Trust finished five development properties at a total cost of $75.3 million and totaled 678,000 square feet in rental space. It then began development of five properties totaling 806,000 square feet of leasable space at an estimated investment of $107.6 million. The company also had another $252 million of development projects already in the works.
Bill Hankowsky, the Chairman, President, and CEO of REIT has stated, “Even though the year started with choppy financial markets, we continue to benefit from a very strong real estate market and we expect 2016 to be another very good year.”
Brandywine Realty Trust, a Pennsylvania-based REIT, completed its portfolio repositioning in the previous year. Over the last 13 months, it has acquired $1.1 billion in property sales. That figure included a recent disposition of 58 office properties (3.9 million sf) to Och Ziff Capital Management Group LLC for $398.1 million. The agreement kicked off Brandywine’s departure from the Richmond, VA, sector and also reduced its New Jersey investments by roughly 44%. The desired effect was to trim back their holdings in non-core suburban Philadelphia assets.
Gerard H. Sweeney, Brandywine’s CEO and President shared, “Our overall disposition efforts have resulted in a significant reduction of our non-core holdings in Pennsylvania, New Jersey, Delaware, Richmond and Northern Virginia. In addition, these transactions significantly increase our financial capacity, reduce debt and provide ample liquidity for our development pipeline.”
In their last quarter, Brandywine forayed into a fee development agreement with Subaru to build the carmaker’s North American headquarters, containing 250,000 square feet in Camden, N.J.
Top Five Projected Net Buyers
“Company — 2016 Acquisition Guidance — 2016 Disposition Guidance — Difference
Douglas Emmett — $1,340,000,000 — $0 — $1,340,000,000
Physicians Realty Trust — $1,000,000,000 — $0 — $1,000,000,000
Store Capital — $750,000,000 — $55,500,000 — $694,500,000
Essex Property Trust — $600,000,000 — $300,000,000 — $300,000,000
SL Green Realty — $1,000,000,000 — $750,000,000 — $250,000,000”
[Original figures compiled by Mark Heschmeyer]
Douglas Emmett, estimated to become a top-buyer, chose not to provide assumptions on investment dispositions, however, recently, the Los Angeles-based REIT made a major purchase, and announced an deal to acquire a portfolio in the city’s Westwood area comprising four executive office buildings, measuring in at just over 1.7 million square feet, at a cost of $1.34 billion.
In the same time frame, Physicians Realty Trust has increased its gross real estate assets in 2015 by over 50%.
“We anticipate similar growth in 2016, as we expect to complete, including the pending investments announced today, between $750 million to $1 billion of total real estate investments in 2016, subject to favorable capital market conditions,” reported John T. Thomas, president and CEO of Physicians Realty.
Physicians Realty also disclosed five possible acquisitions for seven newly established health care facilities across five states for an estimated $100 million.
Essex Property Trust currently engages in multifamily acquisition to development in their California market.
According to Michael Schall, Essex’s CEO, acquisition markets have incurred minimal effects from global economic conditions, and cap rates have remained stable. At this point, quality properties and locations trade at around a 4.25% cap rate using the Essex process, however, more adventurous buyers are often sub 4%.
On the development side, Schall mentioned he sees three vital potential headwind sources: construction lenders are creating stricter lending policies; cities are increasing demands for more low income housing; and construction costs have increased by roughly 10% over each of the last 2 years, while the amount of skilled labor has become inadequate to meet current construction demands.
Despite investors being cautioned that Manhattan CRE might be dropping from its peak this year, SL Green Realty’s CEO Marc Holliday still believes that there are some positive buying opportunities in that market. Holliday went on to add that the New York office REIT would be very particular.
“What it implies is that we believe that this year we might see one or two interesting opportunities, to exercise on them, maybe. And if we do, we’ll do it in a way where they are either funded entirely by sales or with JV equity,” Holliday said. “We’re going to be very, very discerning on our purchases as we always are, at this point in the market.”