Posts Tagged ‘NAREIT’
REITs vs Open Ended Funds
There is a great article in the current edition of REIT Magazine, by Michele Chandler, celebrating the 25th anniversary of the creation of REITs in Canada. Ms. Chandler does a great job explaining why Canada has a REIT system in the first place, and why Canada’s REITs came into being in 1993.
In short, Canada’s commercial real estate market collapsed in 1993, and open-ended funds were flooded with investors redeeming shares. The funds quickly appealed to the government which allowed them to suspend redemption. This, of course, led to liquidity problems for investors. The solution was to turn those funds into close-end REITs which would then be listed on the Toronto Stock Exchange. Investors could sell their shares on the exchange to gain liquidity. Today, the exchange has 38 Canadian REITs with total capitalization of about C$57.7 Billion as of the end of 2017.
This article illustrates one of the subtle but important benefits of REITs as opposed to a private equity fund or an open-ended fund — liquidity without having to sell off the underlying assets in a down market.
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Commercial Real Estate — Prices vs Values
Anyone involved in real estate knows that commercial prices and values have been on a constant uptick since the trough following the recession. The very length and breadth of the recovery has caused nervousness among investors, appraisers, and lenders. Today, I’m looking at two somewhat disparate views on the subject.
First, Calvin Schnure, writing for NAREIT, looks at four measures of valuation:
- Cap rates and cap rate spreads to Treasury yields
- Price gains, either from increasing NOI or decreasing cap rates
- Economic fundamentals, such as occupancy and demand growth
- Leverage and debt growth
At present, none of these is giving off warning signals, according to Schnure. Cap rates continue to be low compared to other cycles, but so are yields across the board. There continues to be room for cap rate compression, in Schnure’s assessment. As for price changes, every sector is showing growing or at least stable NOI, with the proportion of price changes coming from NOI now equal or exceeding price increases coming from cap rate declines. Across the board, REIT occupancy rates are high and on the rise, with industrial and (surprisingly) retail at or near 95%. All equity REITs are in the low 90% range, compared to the high 80’s at the trough of the recession. Finally, debt levels are rising, but at a lower rate than valuations. Ergo, this is not, in his opinion, a debt-fueled cycle. Right now, debt/book ratios are significantly lower than in the previous FOMC tightening cycle (2004-2006). For a full copy of Schnure’s article, click here.
Second, I was at the American Real Estate Society’s annual meeting in Ft. Myers, FL, last week, and had the great pleasure to sit in on a presentation by my good friend Dr. Glenn Mueller of Denver University, the author of the widely acclaimed Market Cycle Monitor. He tracks property types and geographic markets by occupancy, absorption, and new supply statistics, and for years has proffered a very accurate measure of commercial real estate, both nationally and locally, across four potential phases:
- Recovery (rising, although unprofitable rents and occupancy)
- Expansion (rising and profitable rents and occupancy, stimulating new construction)
- Hypersupply (oversupply of new construction and declining rents and occupancy)
- Recession (unprofitable and declining rents and occupancy)
Most markets cycle through these phases in a fairly predictable fashion. Right now, most markets (property types and geography markets) appear to be in the expansion mode, with some (notably, apartments) potentially crossing the line into hypersupply.
In short, commercial real estate markets look healthy, absent the sort of exogenous shocks that sent us into the most recent recession. That said, many of those same metrics read positive prior to the mortgage market melt-down. Of course, commercial real estate actually faired pretty well during the recession, compared to many other asset classes, supporting the notion that in times of economic trouble, real estate equities can be great storers of value.
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So, how’s Real Estate?
OK, OK, OK — we get it. The stock market has been the “place to be” the past few months. Actually, it’s been a great place the past few years. You may not realize it, but 2016 was the first year in the past 6 that the S&P 500 did NOT turn in a double-digit return. That said, the S&P came in at 9.4% for the year, and that’s nothing to sneeze at. The Nasdaq turned in 7.5%, also a decent number.
So, comparatively speaking, how were the returns in Real Estate? Two of the best markers for that are indices produced by the National Association of Real Estate Investment Trusts (NAREIT) and the National Council of Real Estate Investment Fiduciaries (NCREIF). NAREIT is made up of 167 publicly traded equity REITs and 34 mortgage REITs (for our purposes, we’re only interested in the equity side). These have a total market capitalization of slightly over $1 Trillion. NCREIF is an index of non-securitized commercial properties, generally owned by tax-exempt institutions, and totals slightly over $500 Billion in value. Both indices do a pretty good job of benchmarking commercial real estate returns.
For 2016, the NAREIT index came in at 8.63%, or slightly above the NASDAQ and slightly below the S&P. The NCREIF index came in at 7.97%, also not a shabby number. Because of the nature of the NCREIF index, it’s not quite as granular as the NAREIT index, and only reports quarterly.
However, NAREIT reports monthly, and also gives us some return numbers on a sector basis. This can be very telling, because it reminds that an equally weighted REIT portfolio may be inferior to one more carefully chosen. Year to date, the NAREIT index has come in at 4.19%, which is somewhat below the S&P’s 6.68%. However, some sectors such as timber, specialty, and single family homes have turned in double-digit returns already this year, and data centers, infrastructure, and manufactured homes have also bested the S&P. On the other hand, shopping are actually turning in negative returns thus-far this year (notably, regional malls came in negative for 2016). The industrial sector has turned negative in 2017, but enjoyed the top returns of all sectors in 2016, at 30.72% for the year. Lodging/resorts is also negative thus-far in 2017, and also turned in significant positive returns in 2016 at 24.34%.
As always, this is not a recommendation or solicitation to purchase any particular investment, and prior returns are not indicative of what may happen tomorrow. This is just a blog — nothing more than that.
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Merry Christmas to all!
Hope everyone’s having a great holiday season (Christmas here, but with homage to Hanukkah, Kwanza, Winter Solstice, Festivus, and such and so forth….)! Needless to say, 2016 has continued is reign of terror — our condolences go out to the families of Carrie Fisher, George Michael, and a long list of folks who left us w-a-a-a-a-a-y too soon. (We lost three of my favorite space travelers this year — John Glenn, Carrie Fisher, and David Bowie!) This past year suggests the United States may have been founded on an old Native American burial ground….
Ahhh… but enough on that. NAREIT tells me this morning that 2016 was a tough one for REITs in general, but 2017 looks better. (My wife’s Pomeranian could have written THAT press release.) On a somewhat more realistic tone, private equity fund raising is projected to be down among real estate funds in the coming year, which does not portent good things. The Limited appears to be poised for bankruptcy filing, and many (most?) stores that are still open are refusing to accept returns this week. I just wandered into a shopping mall this morning (as I do about twice a year) and noted that The Limited was boarded up. The timing is interesting, since retailers do about 14% of their holiday sales during the week AFTER Christmas.
On another note, S&P CoreLogic’s Case Shiller Index (whew… a mouthful for something started as a student’s MBA project a few years ago…) just announced that house prices from October 2015 to October 2016 rose 5.8%, which isn’t a bad number, and in fact may be a bit high given the present rate of inflation. However, this doesn’t take into account the impact of November’s election, and the likelihood that newly empowered Republicans in Congress will likely tighten capital constraints on major banks. (Ha-Ha-Ha to everyone who thought the GOP was in the pockets of the bankers.) This portends tightening of capital throughout the lending system. Add to this that the dollar is strengthening (the dollar always strengthens in the wake of global uncertainty, irrespective of the source of the uncertainty!) and you get declines both on the supply side and demand side for capital. Couple with this both recent and impending rate hikes at the FED, and one has to wonder what will be a good investment in 2017. (Hint — cash continues to be King.)
Once again, this blog is NOT investment advice, and Greenfield and its senior folks may, from time to time, have investments in things discussed here. It’s just a blog… nothing more….
Well, by for now! May the Force be with you!
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American Real Estate Society Annual Meetings
For many years, Greenfield had been privileged to participate in the annual American Real Estate Society meetings, held in late April and typically in a warm, waterfront location. This year’s meeting was at the Sanibel Harbor Marriott Resort, on the bay near Sanibel Island, Florida.
Of the major academic real estate organizations, ARES has the unique mission of bridging academia and practitioners, and as such draws a large contingent of Ph.D.-types (and others) from organizations like Greenfield. Somewhat surprisingly for an organization which bridges academia and practice, ARES publishes the largest number of scholarly real estate publications, and has the top-ranked academic journal in the real estate, insurance, and banking fields (the Journal of Real Estate Research, edited by my good friend, Dr. Ko Wang of Johns Hopkins University).
Various researchers at Greenfield authored several papers accepted for presentation at the ARES meetings, including:
- The Impact of Fracking Sites on Brownfield Funding (Dr. Clifford Lipscomb)
- Can We Forecast the Next Bubble? (Kilpatrick and Lipscomb)
- A Primer on Cleaning Residential Real Estate Data (Lipscomb and Dr. Andy Krause of U. Melbourne)
- Using a Random Forest Process in an Automated Valuation Model (Lipscomb, Kilpatrick, Jessica Kenyon of Greenfield and Dan Tetrick of Greenfield)
- The Impact of the NAREIT Light Awards on REIT Performance (Kilpatrick and Lipscomb)
Additionally, I had the pleasure of serving as co-chair (with the esteemed Dr. Stephen Roulac of U. Ulster and Roulac Global Research) for one of the sessions where doctoral students presented their research. Dr. Roulac and I heard presentations from students from Yale, from Royal Agricultural University and U. Aberdeen in the U.K, and U. Regensburg in Germany.
I’ll conclude with a big “shout-out” to Dr. Arthur Schwartz, who despite having been retired for quite a few years, serves as the volunteer Meeting Planner for ARES (at no small personal expense) and manages to secure world-class warm-water resorts for these spectacular meetings. Sadly, he is taking a sabbatical for 2016, and the meeting will be in chilly Denver. However, I’m pleased that the meeting will return to San Diego in April, 2017, and to Estero, Fl (near Ft. Myers) in 2018.
REITWorld 2014
REITWorld is the principal annual meeting of the National Association of Real Estate Investment Trusts (NAREIT), held this past week in Atlanta. I had the privilege of representing Greenfield, meeting with many of the top leaders in the securitized real estate field. The tone was generally upbeat, not surprising given the great run that REITs have enjoyed the past few years.
The gathering was a mix of very specific information on individual REITs, provided in small group briefings by the leaders of those REITs, along with several large group meetings with briefings on the industry as a whole. As expected, many of the service providers to the REIT industry were there, such as the research firm SNL Financial, with whom I had several great meetings.
The biggest concern in the meeting was matching past performance. REIT investors have enjoyed unprecedented gains since the trough of the recession, and even though most sectors of the market look stable and solid going forward, no one believes that returns for the next few years will equal those of the past few years.
Leading economists presented two of the five featured programs — Jeffrey Rosensweig, Director of the Global Perspectives Program at Emory U., and Robert Zoellick, currently a Senior Fellow at Harvard’s Kennedy School and former President of the World Bank. In addition, the Board of Governors dinner speaker was former Secretary of State Madeleine Albright. The focus and attention of REIT leaders is clearly on the global scene.
In other news, the death notices for traditional retail may be premature. As noted by Sandeep Mathrani, CEO of General Growth Properties, malls today can really be divided between “A” and “B” properties. The “A” properties are in high demand by in-line tenants, who have much stronger balance sheets than in the past. Right now, occupancies in the high-90% range with strong rent growth is the norm for “A” retail properties. As such, this sector is looking for continued strong growth in the near term.
Europe is projected to be an interesting market in the intermediate term for REITs looking for global expansion and choice properties. About 80% of the commercial real estate debt in Europe is scheduled to mature in the next 5 years, and many if not most of the debt holders are in no position to renew or “roll” that debt. As such, cash-rich investors may have some cherry picking opportunities soon.
Finally, the closing session speaker was Mark Halperin, Managing Editor of Bloomberg Politics. He shared intimate insights on the Washington political scene for the next few years, with a particular emphasis on the presidential campaign (which, if you didn’t notice, started last Wednesday morning).
Tea Leaves and Such
Flying back from Milwaukee to Seattle last night, I sat next to a fellow who owns several big truck dealerships in the mid-west. (Seattle, famed for Boeing and Microsoft, is the lesser-recognized headquarters of Paccar, the world’s third largest maker of heavy trucks, after Daimler and Volvo. Last year, they made and sold over $16 Billion worth of Kenworths and Peterbilts.)
ANYWAY, after the usual “how’s business?” question, I got an earful. Turns out no one’s buying heavy trucks right now, even though financing is historically affordable, and customers have cash. Why? Simply put, his customers are scared of the fiscal cliff. (We also talked about customers deferring potential acquisitions until after/if tax rates go up, but he said that this wasn’t a big issue in his surveys of customer sentiments.) He noted that demand for long-haul trucking was down, and noted that his trucking-company customers were reporting a lower volume of hauling for consumer retailers.
Now, if this was an isolated incident, we could write it off. However, the danger of the fiscal cliff isn’t just what will happen after January 1. Much like an impending hurricane, people are already packing their bags and getting out of the way or hunkering down and bolting the doors.
What is the impact on real estate? While it’s too early to completely quantify, clearly there is reluctance right now to make new investments in office, industrial, and retail. Add to this the realization that the apartment boom may have leveled off, and we have a fairly flat new development market on the horizon. This doesn’t bode well for real estate private equity firms that are focused on development profits or capital gains, but it does mean that income-oriented real estate (publicly traded REITs for example) may exhibit some buying opportunities due to both their tax advantaged nature. The most recent Current Market Commentary from NAREIT shows slight downward trends in apartment, office, and retail vacancy, with all three sectors showing positive rental rate growth (albeit at lower levels than earlier this year). The three-year moving average for renter household formation continues to trend upward, while the owner-occupied household formation is in negative territory (despite recent gains in home sales and housing starts).
Notwithstanding the dangers of the fiscal cliff, changes in non-farm payrolls have been strong and positive every month since mid-2010, and even though unemployment is higher than anyone wants to see it, the trend has been solidly downward since the peak of late 2009. As such, the fiscal cliff is the most significant economic problem on the horizon today. Fix it, and we continue on the track to full recovery. Let us drive off the cliff, and…. well, that’s a pretty good mental picture, eh?
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Corporate Investment — Much ado about…. something
I can’t believe it’s been a month since I posted — I’ve been traveling almost constantly the past few weeks, and between that and the elections, my dance card has been fairly full.
The trigger for day’s post was an article in the Wall Street Journal on Monday, “Investment Falls off a Cliff”, with obvious homage to the impending fiscal cliff. I don’t want to minimize the danger of the “FC”, and in fact all bets are really off if the worst case scenarios come to pass. Here at Greenfield, we don’t really believe Congress and the White House will both fail to blink. Nonetheless, “keeping your powder dry” is always good advise in perilous times.
I’d like to comment on two things, though. First, while direction of corporate investment isn’t good, it’s not quite “double dipping” just yet. Indeed, one might argue that the current downswing in investment is nothing more than seasonal backing-and-filling.
courtesy, Wall Street Journal
Note that after coming out of the recession, overall investment spending took a brief respite in early 2011, as well. Of course, equipment and software appear to continue healthy, but structures are dragging the overall index down. Part of this can be explained by the relaxation of the apartment construction surge that we saw over the past several quarters. Many analysts now believe the demand-overhand in apartments is close to saturation (or at least satisfaction) and this sort of slow-down is neither unusual nor unhealthy. Note that the NFIB optimism survey is still trending upward, although the Business Roundtable CEO survey (which surveys heads of larger firms than the NFIB does) had turned downward. I suspect that’s a rebound effect — small businesses are still clawing their way out of the recession, and are less affected by what may happen if the FC becomes reality. The larger firms were the first to enjoy the fruits of the recovery, and would be the worst hurt by tax increases and the FC cutbacks (particularly in defense). Nonetheless, both of these sentiment measures are well off their 2009 bottoms. Consumer sentiment, which ultimately drives much of this, is as good as its been since before the recession.
Second, I’m concerned about the negativity spreading to real estate. Note that real estate investment comes in three flavors — development, capital gains, and income. The downturn in investment has SOMEWHAT negative implications for the first. Real estate developers will have to be more careful in a slow-down environment, but that’s been true throughout this recovery. Financing is difficult, even in the “hot” apartment market, and so admittedly the commercial real estate developers may be in for a tough run. (Residential development, on the other hand, is rebounding nicely.) Capital gains is a “long game” anyway. Certainly the tax changes which seem inevitable in 2013 and beyond have negative implications for the buy-and-sell crowd, but the returns to those who can hold thru cyclical downturns have always been healthy even after tax considerations.
Real estate income (primarily REITs) may actually be benefitted by a slight retrenchment in development. If and as the economy continues to rebound, offices, warehouses, and shopping malls continue to fill up. Lack of new supply (from a cyclical downturn in development) benefits the sort of existing structures which are typically part of a REIT portfolio. As always, investors will be benefitted from looking at good managers with top-drawer properties and a history of increasing FFO.
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Economic outlook — fundamentals and shocks
I love boating, I really do. To quote from Grahame’s famous The Wind in the Willow, “…there is NOTHING–absolute nothing–half so much worth doing as simply messing about in boats.” However, any experienced sailor has had one of those days when the water was perfect, the wind was with you, but off on the horizon a storm cloud lurked. “Will it head our way, or pass us by?” is the key to whether the fun cruise continues or not.
Today, and for the next few weeks, the economy is like that. The wind is definitely at our backs, and things are generally looking up. That having been said, the fiscal cliff continues to loom on the not-too-distant horizon.
First, the good news, and there’s plenty of it. I’m on the Board of an investment fund (and in fact just got named chairman of the board this month, for a two-year stint). We had a great briefing yesterday from our lead fund manager, and macroeconomic news was as good as I’ve seen it in a while. Corporate profits are at near-record levels as a percentage of GDP, and non-financial interest expense as a percentage of profits is at a near-record low. Lending is back up, although corporate lending isn’t quite as robust as consumer lending, and current stock market price-earnings ratios (measured on a 12-month trailing basis) are at levels usually associated with strong intermediate-term (5-year) market returns. Equity risk premia tell the same story.
On the real estate side, everyone’s seen the news that the S&P Case Shiller index is trending back up, and this morning’s news report puts current housing starts above an 800,000 annualized level (note that we’re hoping for a million, and at the trough of the recession we were at a record low 300,000-ish). Manufacturing has added about a half-million jobs since the trough of the recession (early 2010), and is about 300,000 above where it stood in July, 2009.
The implications for real estate investment are clear, and as I reported earlier this week, the total return on U.S. REITs has exceeded 30% in the past year, besting the S&P 500.
With that in mind, though, the fiscal cliff continues to trouble us all. If you’re not familiar, on January 1, the Bush Tax Cuts will expire and mandated federal spending cuts are scheduled. Together, these two will hit the economy to the tune of about 4% of GDP (yes, driving us into a second recession). Sadly, the solution is political, and this is all coming at a time when Congress and the White House are totally focused on the impending election.
We’ll keep you posted, and we’re preparing some private white papers on this subject for our clients as the season moves forward.
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REITs — good news trumps “iffy” news
The “headline” in Erika Morphy’s piece in GlobeSt.Com this morning was that was that REITs underperformed the S&P 500 for August and September. Specifically, REITs were up 1.85% in the 3rd quarter this year, compared to 6.35% for the S&P 500. You have to dig a little deeper to get to the heart of the matter, though.
First, let’s remember that investors by-and-large buy REITs as an income vehicle with equity up-side. The current average REIT yield is 3.88% — not bad, compared to corporate bonds or preferred stocks, and more targeted income seekers can go after single tenant retail with a yield of 5.9%. (For a great review of this, see a piece by Brad Thomas in Forbes.com from September 10). Couple those sorts of dividend yields with any upside equity potential, and you have a real investment powerhouse in today’s market. For comparison, the current yield on the S&P 500 is 1.97%.
But, the news gets better. For the 12-months ending September 30, the NAREIT index was up 33.81%, compared to 30.2% for the S&P. Do the math — the total return for a portfolio of REIT shares for the past year would have been (33.81% + 3.88% = ) 37.69%. The total yield for the S&P 500 would have been (30.2% + 1.97% = ) 32.17%. Thus, slightly more than a 500 basis point return advantage to REITs.
Of course, (and this goes without saying), past performance doesn’t translate into future returns…..
From a small northwestern observatory... 