As market conditions cause several REITs to sell off properties, lenders can reap the benefits. But for a limited time only.
Even though real asset values in the US have remained strong, the stock value of REITs — tied to the rocky global markets — has dropped.
US commercial real estate property prices were 16.2 percent higher at the end of February than they were during the last market peak in 2007, and 8.5 percent higher than they were a year ago, according to the Moody’s/RCA Commercial Property Price Indices.
Yet total returns on REIT stock dropped 8.9 percent last year, according to the FTSE NAREIT US Real Estate Index Series released last month.
To contend with this contrast, several REITs are selling off properties as a deliberate investment strategy, and that’s creating new opportunities for lenders.
The head of a large mortgage REIT told Real Estate Capital that he — and his competitors — intend to capitalize on this selloff as investors scoop these properties up and seek loans to leverage the acquisitions.
Tawan Davis, chief executive officer at Steinbridge Group, a private real estate investment firm, notes that “as the spread between a REIT’s net asset value and stock prices widens, it creates a real opportunity to acquire a portfolio of real estate.”
“You’re going to see a lot of that going forward, especially on the part of the large firms,” he says.
Speaking on a panel at the 2016 Urban Land Institute Spring Meeting last week, many REIT executives said they would shift into disposition mode.
Panelist Gerard Sweeney, CEO of Brandywine Realty Trust, said that his company is shifting focus toward selling assets and would back away from new acquisitions, while fellow panelist William Hankowsky, chairman of Liberty Property Trust, added that “selling assets has been the primary source of funding for our development,” Commercial Property Executive reported.
REITs seem to have had little trouble selling off their portfolios, many using the sale proceeds to reinvest in their company stock.
First Potomac Realty Trust sold its entire Northern Virginia non-core portfolio, including eight properties, for $90.5 million last month, part of the company’s plan to dispose of $350 million of assets in 2016. The trust utilized the proceeds from that sale to redeem a portion of the trust’s remaining 7.75 percent Series A preferred shares.
Meanwhile, Corporate Office Properties Trust plans to dispose of $400–$425 million of its property and land portfolio this year in order to “further refine [its] portfolio and fund development” and “maintain balance sheet objectives,” according to a presentation to investors last month.
Among the properties sold so far: seven suburban office properties in Baltimore and Virginia for approximately $200 million and two additional buildings in Northern Virginia, extinguishing $167 million of debt and accrued interest.
“This sort of buying opportunity, opened by otherwise troubling market volatility, happens a lot in commercial real estate markets,” Davis notes, adding that the REITs went through similar selling offs in 1991, 2001, and during the most recent recession.
The REITs are once again making the volatility in the global markets work for them by cashing in properties and reinvesting in themselves. Lenders in commercial real estate market can make this opportunity work for them too. But, as history has shown, they’ll need to jump on these opportunities fast before today’s turbulent markets even out.