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Equity Commonwealth Agrees to Buy Monmouth Real Estate Investment in $3.4 Billion Deal

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Equity Commonwealth Agrees to Buy Monmouth Real Estate Investment in $3.4 Billion Deal Sarah Borchers… May. 5 2021
Teaser

Equity Commonwealth plans to shed office assets; Sam Zell says still “significant” growth in industrial.

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Equity Commonwealth (NYSE: EQC) will acquire Monmouth Real Estate Investment Corp. (NYSE: MNR) in an all-stock transaction valued at approximately $3.4 billion, including debt, the two companies said May 5.

Once the acquisition closes, Equity Commonwealth is expected to have approximately $2.5 billion of pro forma cash on its balance sheet. The company plans to dispose of its four office properties and Monmouth’s portfolio of marketable securities over time and reinvest the proceeds in future acquisitions.

Equity Commonwealth President and CEO David Helfand said Monmouth provides “an attractive and scalable platform” that the company can grow, given its significant cash and balance sheet capacity.

Sam Zell, chairman of Equity Commonwealth, said the transaction provides Equity Commonwealth with a high-quality, net-leased industrial business with stable cash flows while preserving the REIT’s balance sheet capacity for future acquisitions.

During a conference call, Zell acknowledged that the industrial space is “very crowded at the moment,” but added that not many players have $5 billion of buying capability and cash on the balance sheet. “It’s going to be up to us to take advantage of that set of circumstances,” he said.

Zell denied a suggestion that Equity Commonwealth was late in entering the industrial sector, which he said, “still has a very significant amount of room yet to grow.” As for the office sector, Zell noted that the market was oversupplied even before the pandemic. “Oversupply is going to impact that sector very significantly over the next few years.”

Helfand noted during the call that the office properties are not currently being marketed and that the company will “look for opportunities when it makes sense.”

Meanwhile, Michael Landy, president and CEO of Monmouth, said that following a strategic alternatives process, the board unanimously determined that the merger was the best outcome to maximize value for Monmouth stockholders.

The transaction states that Monmouth shareholders will receive 0.67 shares of Equity Commonwealth for each share they own. Based on the closing price for Equity Commonwealth on May 4, this represents approximately $19.40 per Monmouth share, versus the May 4 closing price of $18.55.

The combined company is expected to have a pro forma equity market capitalization of approximately $5.5 billion.

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Realty Income, VEREIT Agree to Merge; Office Assets to be Spun-Off

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Realty Income, VEREIT Agree to Merge; Office Assets to be Spun-Off Sarah Borchers… Apr. 29 2021
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Combined net lease REIT will have enterprise value of approximately $50 billion.

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Realty Income Corp . (NYSE: O) said April 29 that it has agreed to acquire VEREIT, Inc. (NYSE: VER) in an all-stock transaction, creating a combined company with an enterprise value of approximately $50 billion.

In addition, the two REITs plan to spin-off 97 office properties into a new, self-managed, publicly traded REIT (SpinCo), saying that office real estate does not play a role in the company’s long-term acquisition strategy.

Under the terms of the agreement, VEREIT shareholders will receive 0.705 shares of Realty Income stock for every share of VEREIT stock, representing a 17% premium to the previous day’s closing price.

Following the merger and the spin-off, Realty Income will continue as the surviving public entity. Realty Income and former VEREIT shareholders are expected to own approximately 70% and 30%, respectively, of both Realty Income and SpinCo.

During a conference call, Realty Income President and CEO Sumit Roy said the merger would be immediately accretive to adjusted funds from operations (AFFO) and would provide value creation for Realty Income's shareholders—while enhancing the REIT’s ability to execute on its ambitious growth initiatives.

As a combined entity, the merged company will benefit from increased size, scale, and diversification, continuing to distance itself as the leader in the net lease industry, Roy said. He noted that VEREIT's real estate portfolio is “highly complementary,” which is expected to further enhance the consistency and durability of cash flows.

Glenn Rufrano, CEO of VEREIT, said the merger recognizes the value created in VEREIT, which had been the objective of the management team since 2015. "We put an excellent team in place, enhanced the portfolio, created an investment-grade balance sheet, and resolved all legacy issues,” he said.

Meanwhile, Roy described the net lease market as “incredibly fragmented.” While acknowledging the company’s global goals, he noted that “we have to walk before we can run.” Realty Income's growth strategy is expected to remain focused primarily on high-quality, single-tenant net lease retail and industrial properties in the U.S. and U.K., leased to clients that are leaders in their respective businesses.

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Industry Experts Publish First Academically-Focused Textbook on REIT Investment

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Industry Experts Publish First Academically-Focused Textbook on REIT Investment Sarah Borchers… Apr. 23 2021
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Stephanie Krewson-Kelly and Glenn Mueller are co-authors of Educated REIT Investing

 

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The authors of a new book on REITs and real estate investment, Educated REIT Investing, say it is the first of its kind to target academic institutions, while still being concise enough to attract a general audience.

The book is co-authored by Stephanie Krewson-Kelly, vice president of investor relations at Corporate Office Educated REIT InvestingProperties Trust (NYSE: OFC), and Glenn Mueller, a professor at the University of Denver’s Franklin L. Burns School of Real Estate and Construction Management, and a real estate investment strategist at Black Creek Group.

The book updates Krewson-Kelly’s 2016 book, The Intelligent REIT Investor, and includes new chapters by Mueller. Nareit Senior Economist Calvin Schnure and Merrie Frankel, president of Minerva Realty Consultants, also contributed to the book.

Krewson-Kelly pointed to two main reasons to update the 2016 book: The 2017 Tax Cuts and Jobs Act changed the way that REIT dividends are taxed at the investor level, she said, and in 2018, Nareit tweaked its definition of funds from operations (FFO).

Since most of the 2016 sales came from educational institutions, it was decided to create the first textbook on REITs, Krewson-Kelly explained. She described it as “the only comprehensive book on how to analyze and invest in REITs.” Mueller added that the book includes presentations for each chapter, along with exams and case studies.

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Safehold CEO Says Strong Rent Coverage, New Credit Ratings Position REIT for Growth

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Safehold CEO Says Strong Rent Coverage, New Credit Ratings Position REIT for Growth Sarah Borchers… Apr. 16 2021
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Jay Sugarman says ground lease market could eventually grow to around $1 trillion.

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With 100% of its ground lease rents paid in 2020 and newly-received investment grade credit ratings, Safehold Inc. (NYSE: SAFE) Chairman and CEO Jay Sugarman says the REIT is “really well positioned to keep growing.”

Speaking on the REIT Report, Sugarman noted that despite the challenges of 2020, “last year actually proved how strong the business is.” Meanwhile, new ratings from Moody’s Investors Services and Fitch Ratings “will be a pretty major competitive advantage,” he added.

Sugarman noted that when it comes to selecting particular property types, “our mission is to go where the best markets and land is.” Multifamily has been a “great story so far,” and represents about 25% of the portfolio, he said. “I imagine we’ll be in all property types in the top 30 markets in the next year or so.”

Meanwhile, Sugarman said he believes the modern ground lease structure “can do for commercial real estate what net lease did for the corporate world, and that’s about a $1 trillion industry.”

“We think there are big things ahead as more and more people understand that modern ground leases are just a more efficient, lower cost solution, and very similar to what corporations have been doing with net leases for decades…there’s no reason this can’t become a $1 trillion industry as well,” Sugarman said.

As for new entrants in the market, Sugarman said he welcomes the interest: “We want this to be a mainstream product so the more people who are out there educating the market the better.”

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Kimco and Weingarten Realty to Merge, Creating $12 Billion Market Cap REIT

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Kimco and Weingarten Realty to Merge, Creating $12 Billion Market Cap REIT Sarah Borchers… Apr. 15 2021
Teaser

Merger underscores conviction in open-air shopping center segment.

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Kimco Realty Corp . (NYSE: KIM) said April 15 it will merge with Weingarten Realty Investors (NYSE: WRI) in an approximately $3.9 billion cash and stock deal, creating a major player in the open-air shopping center segment that has held up well during the pandemic.

The merger will create a national operating portfolio of 559 open-air grocery-anchored shopping centers and mixed-use assets, with properties mainly concentrated in the top major metro markets.

The combined company is expected to have a pro forma equity market capitalization of approximately $12 billion and a pro forma total enterprise value of approximately $20.5 billion.

Under the agreement, each Weingarten common share will be converted into 1.408 newly issued Kimco common stock, plus $2.89 in cash. Based on the closing stock price for Kimco on April 14, this represents a total value of approximately $30.32 per Weingarten share. Kimco shareholders are expected to own approximately 71% of the combined company’s equity, with Weingarten shareholders owning approximately 29%.

“This business combination is highly strategic, creating a stronger platform that is even more capable of delivering long-term growth and value creation,” said Conor Flynn, Kimco CEO.

Flynn said the transaction, which is expected to be completed in the second half of this year, reflects a strong conviction in grocery-anchored shopping centers. The category, he said, has performed well throughout the pandemic and provides last-mile locations that are “more valuable than ever due to their hybrid role as both shopping destinations and omnichannel fulfillment epicenters.”

The combined company is expected to benefit from increased scale and density in key Sun Belt markets, enhanced asset quality, tenant diversity, a larger redevelopment pipeline, and a deleveraged balance sheet.

Drew Alexander, chairman, president, and CEO of Weingarten, said the combined company’s increased size and scale, together with its financial strength, “should drive an advantageous cost of capital, allowing the combined company to more readily pursue value creation opportunities.”

Meanwhile, Haendel St. Juste, managing director and senior REITs analyst at Mizuho Securities, described the deal pricing as a “good read-through for the sector…it gives clarity on asset values.”

At the same time, St. Juste does not see the deal as necessarily providing an impetus for further M&A activity. Institutional capital had been buying shopping center assets before the pandemic, he said, but has since pulled back. “There’s some post-COVID euphoria…but there’s also a reality that it’s still a pretty challenged business and do you want to be buying portfolios?”

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REITs Named as EPA 2021 ENERGY STAR Award Winners

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REITs Named as EPA 2021 ENERGY STAR Award Winners Sarah Borchers… Apr. 15 2021
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Seven REITs received the ENERGY STAR sustained excellence award, the highest honor.

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Thirteen REITs have been named as 2021 Environmental Protection Agency (EPA) ENERGY STAR Partner of the Year Award winners, with seven of the 13 receiving a Sustained Excellence Award—the highest honor among ENERGY STAR Awards.

Each year, EPA honors a group of businesses and organizations that have made outstanding contributions to protecting the environment through superior energy efficiency achievements.

EPA presents the Sustained Excellence Award to businesses or organizations that have already received ENERGY STAR Partner of the Year recognition for a minimum of two consecutive years and have gone above and beyond the criteria needed to qualify for recognition.

REITs that received the Sustained Excellence Award include:

Kilroy Realty Corp . (NYSE: KRC), its sixth consecutive Sustained Excellence win

Vornado Realty Trust (NYSE: VNO), its sixth consecutive Sustained Excellence win

SL Green Realty Corp . (NYSE: SLG), its fourth consecutive Sustained Excellence win

Office Properties Income Trust (Nasdaq: OPI), its second consecutive Sustained Excellence win

Boston Properties, Inc . (NYSE: BXP), its first Sustained Excellence win

Hudson Pacific Properties, Inc . (NYSE: HPP), its first Sustained Excellence win

Welltower Inc . (NYSE: WELL), its first Sustained Excellence win

In addition, The RMR Group LLC, which manages all properties owned by Office Properties Income Trust, had its first Sustained Excellence win.

REITs that were named as a Partner of the Year award winner include:

Columbia Property Trust, Inc, (NYSE: CXP); Digital Realty Trust, Inc. (NYSE: DLR); Empire State Realty Trust, Inc. (NYSE: ESRT); Physicians Realty Trust (NYSE: DOC); Piedmont Office Realty Trust, Inc. (NYSE: PDM); and, Ventas, Inc. (NYSE: VTR).

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Physicians Realty Advances Sustainability Across Medical Office Building Portfolio

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Physicians Realty Advances Sustainability Across Medical Office Building Portfolio Kyle Gustafson Apr. 13 2021
Physicians Realty Advances Sustainability Across Medical Office Building Portfolio

Physicians Realty Trust is working to be a sustainability trailblazer in green initiatives across its portfolio by setting aggressive goals, emphasizing accountability, and adopting a building certification platform particularly well-suited to the assets in its portfolio.

Health East Clinic
Photo courtesy of Physicians Realty Trust.

Physicians Realty Trust (NYSE: DOC) is working to be a sustainability trailblazer in green initiatives across its portfolio by setting aggressive goals, emphasizing accountability, and adopting a building certification platform particularly well-suited to the assets in its portfolio.

John Thomas, president and CEO of Physicians Realty, says the organization has always had a focus on implementing environmental stewardship “in a way that has a direct financial benefit for our tenants, and ultimately, contributes to better health care for the communities we serve.”

While sustainability has long been a company priority, Physicians Realty, which has built a $4 billion-plus portfolio that includes 269 outpatient medical buildings, surgery centers, and cancer centers across 36 states, undertook an initiative in 2018 to develop and launch a formal environmental, social, and governance (ESG) program.

Under the helm of Mark Theine, Physician Realty’s executive vice president of asset management, the company’s ESG team collected years of data, creating a baseline of sustainability metrics across its portfolio. To reach its sustainability goals, Physicians Realty analyzes areas of highest energy usage, emissions, water, and waste at its buildings to both enhance operations and plan for future system upgrades.

All of Physician Realty’s environmental projects adhere to what the company has coined a “G2 Sustainability” philosophy, resulting in positive returns for tenants and investors.

“Our ‘green’ initiatives lead to ‘green’ money savings for our tenants, and ultimately, that improves the quality of the buildings,” Theine explains. “It creates a better facility for patient care, the hospital systems are able to operate those buildings cost-efficiently, and that keeps them committed to those buildings long term, which of course, helps Physicians Realty and our shareholders. It’s a win-win.”

Based on 2018 performance, the company set aggressive goals for the next three years, including a 10% reduction in energy, emissions, and water usage along with a 10% increase in waste diversion. To publicize results, the company released its first interactive ESG Report in June 2020.

“We made great progress in our first year,” Theine notes. “Utilizing 2018 as our base year, we recorded about a 2.5% progression toward our energy, emissions, water, and waste targets.”

Thomas adds that under Theine’s leadership, the company has seen “fantastic results.” By putting the annual ESG Report online, the organization wants to be “held accountable to achieve those results and exceed those goals,” Thomas says.

Adoption of IREM CSP

Among its various ESG initiatives, Physicians Realty adopted a building certification program that complemented other programs it was already utilizing, including LEED and ENERGY STAR. The program it selected, the IREM Certified Sustainable Property (CSP) program, has become a cornerstone of Physician Realty’s green initiatives.

IREM allows for the certification of properties not covered by other programs. For example, LEED—the world’s most recognizable green building certification program—isn’t necessarily appropriate for all properties, especially older ones. Brand-new green buildings boasting environmentally friendly features are often LEED-certified. IREM’s program, meanwhile, gives existing buildings the opportunity to catch up.

“One of the things we like about the IREM certification is since we’re primarily acquiring existing properties around the country, we can take an existing building and improve it by putting sustainability practices into the building,” Theine explains.

Thomas agrees, pointing out that IREM’s program allows the company to pursue measurable efforts in buildings it owns. “We really do see the IREM program as having a much more meaningful impact, because we can acquire buildings and use their evaluation metrics as part of our underwriting process to improve operations,” he notes.

To earn IREM CSP certification, properties must meet baseline requirements and earn points across energy, water, health, recycling, and purchasing categories. IREM provides a checklist and scorecard for tracking and a third party audits the program.

Physicians Realty earned IREM CSP designations at eight properties in 2019 and another 10 designations in 2020. The company has initially committed to achieve designations at 25 multi-tenant properties over three years.

The REIT has tied these IREM goals to its corporate and compensation goals for the executive team, Theine points out. “Our board has done a great job leading with vision and demonstrating a commitment to sustainability by deliberately tying our compensation to our sustainability goals,” he adds.

Healthcare building exterior
Photo courtesy of Physicians Realty Trust.

Sustainability in Action

One of the most sustainable properties in Physicians Realty’s portfolio, the HealthEast Clinic and Specialty Center in Maplewood, Minnesota, includes all LED lighting and low-flow plumbing fixtures, while an aggressive new recycling program has helped achieve a 45% diversion rate for recyclable materials.

Strictly Pediatrics Specialty Center in Austin, Texas, features a 2,500-square-foot-panel solar array—one of the largest in Central Texas—which generates 900,000 million kilowatts of clean energy annually. Over the next 25 years, the Strictly Pediatrics solar system is expected to save $2.6 million in electricity costs and avoid approximately 21,466 metric tons of carbon dioxide from being released into the atmosphere. A recent retrofit of the interior lighting will further reduce the property’s carbon footprint.

The Baylor Scott & White Charles A. Sammons Cancer Center in Dallas, one of the country’s largest medical office buildings, received LEED Gold certification, ENERGY STAR certification, and designation as an IREM CSP property.

Through retrofitting common area lighting fixtures and updating outdated HVAC components, the company achieved an 8.5% reduction in energy use at the property from 2018 to 2019. A recommissioning of the building mechanical systems is underway, which Physicians Realty expects to further reduce the site’s energy usage by an additional 3-5%.

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REITs are Helping to Bridge the Gap

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REITs are Helping to Bridge the Gap Kyle Gustafson Apr. 13 2021

Michele Lerner

Michele Lerner is a freelance writer and regular contributor to REIT magazine.

REITs are contributing a range of solutions to the affordable housing crisis by focusing on median-priced apartments, manufactured homes, or partnering with nonprofits.

Bridging the Gap

REITs are contributing a range of solutions to the affordable housing crisis by focusing on median-priced apartments, manufactured homes, or partnering with nonprofits.

BSR deveopmnt in Richmond, TX
Photo courtesy of BSR Real Estate Investment Trust.

Stagnant wage growth coupled with increased housing costs and a shortage of affordable homes for renters and buyers have created a housing crisis in the U.S. The COVID-19 pandemic and global recession have further widened the gap between wages and housing costs, making the role that REITs play in supplying affordable, middle-income housing more important than ever.

In addition to supplying a vital social need, REITs have also tapped a market niche that provides consistent and solid returns for their investors, even during the current period of economic uncertainty.

According to the State of the Nation’s Housing 2020 Report by the Joint Center for Housing Studies at Harvard University, approximately 37.1 million households, about 30% of all American households, were considered “cost burdened” in 2019, which means they spent more than 30% of their income on housing. Approximately 14% of American households spend 50% or more of their income on housing, the report states.

The problem is worse for extremely low-income renters whose household income is below the poverty level, or 30% of area median income. According to the National Low Income Housing Coalition, the U.S. has a shortage of seven million affordable rental homes for those households.

Christopher Ptomey, executive director of the Terwilliger Center for Housing at the Urban Land Institute, says there’s a disconnect in the housing market between the higher end of the market and the low end.

“The problem is there’s no moderate-income housing for people to move up from lower-cost housing, or to move down from an expensive apartment if their circumstances change. REITs can provide investment into that middle level of housing,” Ptomey says.

While many people associate affordable housing with low-income households, financial experts generally define “affordable” as a home that costs less than 30% of household income.

“The most common role for REITs to play in creating more affordable housing options is by purchasing and upgrading older multifamily buildings,” says Merrill Ross, managing director and senior research analyst for REITs with Compass Point Research and Trading. She says this strategy, which benefits investors looking for reliable growth, works best in markets with good job growth for middle-income jobs, such as Texas, Florida, and South Carolina.

Affordable Options

Mark Decker, Jr., president and CEO of Centerspace Homes (formerly IRET) (NYSE: CSR), says his company’s strategy shifted about three years ago from several property sectors to just one: multifamily housing in secondary and tertiary markets in the Midwest.

“We’re focused on the fat part of the demand curve—apartments that are affordable to most people in the market,” Decker says. “If you think of the housing market as a bell curve, we’re invested a little to the left of the peak of the curve and a lot to the right. We’re trying to make money for our investors, so we put ourselves in a position where there’s lots of demand and pricing power.”

Housing development with porch
Photo courtesy of Sun Communities.

At the same time, rents remain attainable for median-income households. For example, the average rent in Centerspace’s Minneapolis portfolio is $1,500 to $1,600—slightly above the average rent of $1,400 in that market.

“We’re ‘freshwater fishermen’, not likely to go into the coastal markets,” Decker says. “We focus on innovative markets with a high quality of life like Denver and the Twin Cities and Billings, Montana, which is a smaller market but one that’s attracting new residents.”

Decker says that REITs have a role to play in solving the affordable housing crisis.

“We’re not telling investors that we’re trying to build affordable housing, because that’s not our business,” says Decker. “But there’s a solution between ‘profits are everything’ versus ‘the government subsidizes everything’. We’re just trying to make our corner as good as possible and invest in locations where we can buy and improve housing that’s affordable for most of the people who live there.”

Brian Mitts, CFO of NexPoint Real Estate Advisors, a real estate investment platform that includes NexPoint Residential Trust, Inc. (NYSE: NXRT), says “the simplest way we define affordable housing is by looking at the demographics of our tenant and the market.” The average household income of NexPoint tenants is about $55,000 and rents typically require 20% to 25% of their income, he says.

Mitts says that NexPoint’s strategy is simple: focus on growing Sun Belt markets and locations where other companies are not investing. “We go into older garden-style apartment communities that haven’t been invested in for 20 years, bring the apartments into the modern era, and continue to charge affordable rents,” Mitts says.

NexPoint buys these communities at a large discount and saves 30% or more compared to the land, labor, and materials costs of building a new community, Mitts explains. Depending on the condition of the community and the market, NexPoint will modernize the leasing center, pool, business center, and possibly the parking lot or roof if needed. The interiors of the units are updated on a natural basis when tenants move. Carpets are replaced with durable floors, cabinets are repainted, fixtures and hardware are replaced, and energy-efficient appliances are installed.

“If we spend $5,000 on a unit, we get a good return if we can charge $50 or $100 more in rent,” Mitts says. “We’re delivering value to renters and investors.”

When the pandemic hit, NexPoint developed payment plans for tenants who had lost income and helped connect others with $1 million in rental assistance from a variety of sources.

“Across our portfolio, we have maybe 2% at most of our tenants who owe back rent now,” Mitts says.

Adding Value

The low cost of living and low taxes in Texas have attracted businesses and therefore renters to the state, says John Bailey, CEO of BSR Real Estate Investment Trust (TSX: HOM.U; HOM.UN). Bailey says BSR plans to double the size of its portfolio in that state over the next three years. The Canadian-based REIT went public in May 2018.

“Our focus is on providing affordable homes to median-income households in the markets we serve,” Bailey says. The average ratio of rent to annual income across the BSR portfolio is 19.3%. The median income in its core markets is $60,000 to $70,000. Those locations also have some of the lowest unemployment rates in the nation, Bailey says.

Defining the affordable housing gap

“Our strategy is to stay in our lane,” Bailey says. “My parents started this company in 1956 and in 1991 we started primarily investing in apartments that we buy and hold for the long term. We love the median-income cohort because there’s strong demand in a good economy and there’s strong demand in a downturn from people moving down from high-cost rentals.”

BSR recently began purchasing new, partially-leased multifamily properties, which Bailey says are “higher-end to us.” For example, they purchased a building in Houston in the fourth quarter of 2020 that was 36% leased and is now 72% leased. Their portfolio went from an average age of 29 years in 2018 to an average age of 16 years in 2020.

“We’re committed to maintaining our average rent-to-income ratios in the low 20% range,” Bailey says. Occupancy rates in 2020 remained at about 95%, he says. “We didn’t get our usual rent growth of 3% to 5%, but we got 2% rent growth, even in 2020, because of adding value to our buildings,” he adds. “Our investors are satisfied because we’ve shown the safety of our product.”

“Attainable Housing”

Meanwhile, lingering, often negative images of trailer parks and old-fashioned metal mobile homes have created a stigma among local communities and zoning officials that has prevented the widespread adoption of a simple solution to the affordable housing crisis: manufactured homes.

“We build modern, energy-efficient homes with 1,000 square feet, three bedrooms, two bathrooms, a storage shed and a driveway where you can park two cars on 5,000-square-foot lots that rent for $750 per month,” says Sam Landy, president and CEO of UMH Properties, Inc. (NYSE: UMH). “We have a waiting list for these homes and even during the pandemic we had 97% occupancy rates and 98% rental payments.”

John McLaren, president and COO of Sun Communities, Inc. (NYSE: SUI), says manufactured housing “truly is the best value proposition for affordable housing.” He cites the lower barrier to entry—Sun’s average new home sale price last year was $135,000—along with lower taxes for a home that is situated in a highly-amenitized community. McLaren says Sun Communities likes to refer to its manufactured homes as “attainable housing.”

UMH, which was founded in 1968 by Landy’s father Eugene, became a REIT in 1985 and now has a portfolio of 126 manufactured home communities. “We went public because only a REIT could generate the equity and financial staying power to afford to invest in the land and the time it takes to overcome resistance to this affordable workforce housing,” Landy says.

The manufactured housing industry was booming between the 1960s and 1990s, Landy explains, when people would buy and finance their homes and rent their lot. “Unfortunately, many of those loans went bad in the early 2000s because of the loss of manufacturing jobs that meant people needed to relocate,” he says.

Many of the homes were abandoned, Landy notes. “After the housing crisis, our customers couldn’t get financing, so we provided it ourselves, but the lending rules got tighter and too many people couldn’t meet the debt-to-income ratios or they had a previous foreclosure.” In 2011, UMH began renting their manufactured homes and expanded their portfolio. Most of their communities include a mix of renters and buyers.

Local Resistence

Despite recent progress, community opposition to manufactured homes continues to be a challenge.

Pine Manor
Photo courtesy of UMH Properties.

“Once local authorities see what we’re building, there’s less resistance,” says Aaron Potter, director of ESG for UMH. “We try to bring legislators directly into our communities so they can see how clean they are, with sidewalks, swimming pools, manicured lawns and cars parked in the right places.”

Developing a manufactured housing community includes updating sewer lines and other infrastructure that adds value to the entire area, Potter says, which is embraced in locations such as Tennessee, Ohio, and Western Pennsylvania. Other areas, such as New Jersey and Northeastern Pennsylvania, however, continue to resist manufactured housing, he adds.

McLaren at Sun Communities says an “interesting evolution” has taken place over the last several years. He meets with municipalities, city and town councils, and planning commissions to discuss the REIT’s planned developments, and “four years ago it was a more difficult conversation than it is today.”

Part of that change is because Sun has completed seven greenfield developments in the last three-and-a-half years, enabling officials to see the quality of home finishes, the awareness of environmental impact, and the innovation in home design, McLaren explains.

McLaren adds that Sun Communities puts a “tremendous amount of effort” into creating a residential feel for their communities, making it difficult to distinguish between neighborhoods of manufactured homes versus those of traditional single family homes.

And while some acceleration to zoning and entitlement procedures has occurred, it is still a “very challenging process” to go through, McLaren adds.

Looking ahead, McLaren sees no let-up in demand within the manufactured housing niche. “COVID and 2020 demonstrated the need, more than ever, for attainable housing,” McLaren says. Sun’s application counts are at their highest level ever, he adds, “and that need continues to grow.”

Social Impact and Solid Returns

chart of income related to housing costs

The pandemic has undoubtedly had an outsize impact on low-to-moderate income tenants, which includes essential workers such as home health aides, grocery store employees, delivery drivers, as well as those in the hospitality and retail industries, says Anne McCulloch, CEO of Housing Partnership Equity Trust (HPET), which invests in apartments affordable to households with incomes between 50% and 80% of area median income.

“We run our apartments on very thin margins, so we manage them carefully and have significant operating reserves set aside because we know our residents are more vulnerable than those with higher incomes,” McCulloch says.

HPET was created by nonprofit housing providers who realized it was a gamechanger to tap into private capital, McCulloch explains. “The government can’t be enough to solve the need for workforce housing,” she says. “We acquire properties with our nonprofit partners, who are some of the largest regional and national nonprofits and are deeply connected to the communities where they operate.”

The deals are conservative, typically with a 20% down payment and 80% financed with a Freddie Mac or Fannie Mae loan to HPET, according to McCulloch.

“With our nonprofit partners we can take advantage of state and local tax abatements and subsidies for affordable housing to reduce our operating costs and to be competitive for properties,” she says.

The nonprofit partnerships also make HPET’s offer more appealing to local jurisdictions that share the mission of preserving and creating affordable workforce housing.

“HPET’s model of partnering with ground level housing partnerships to provide them with capital is working spectacularly well to increase the supply of low-income housing and to attract investors,” Christopher Ptomey, executive director of the Terwilliger Center for Housing at the Urban Land Institute, notes.

McCulloch says that 120,000 to 240,000 units of affordable housing are lost every year because they are obsolete or repositioned for higher income housing. HPET focuses on rehabbing apartments with modest, cost-effective upgrades that drive down operating costs and in turn, create a better community.

Investors may not see high double-digit returns, but affordable housing has relatively low risk or volatility, McCulloch says. “Investing in housing is the single most holistic way to make a social impact because housing sits at the intersection of every aspect of society where equity lags,” she says.

Housing is also an easily understood investment, McCulloch points out. “There are lots of other impact investment options available, but some of them may have losses,” she says. “People come to us first because they want to make a positive impact on their community, but then they realize this is a solid, low-risk investment.”

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REITs Look Poised to Climb in 2021

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REITs Look Poised to Climb in 2021 Kyle Gustafson Apr. 13 2021

Following the challenges of 2020, leading real estate fund managers expect REITs to benefit from improving fundamentals in 2021.

Gaining Ground

Following the challenges of 2020, leading real estate fund managers expect REITs to benefit from improving fundamentals in 2021.

Group headshots of financial advisors

The REIT sector looks poised to regain its stride in 2021, leading real estate investment fund managers say, after the social and economic upheaval triggered by the coronavirus pandemic weighed on performance last year and resulted in a 5.12% decline in total returns for the FTSE Nareit All Equity REITs Index.

Several factors are expected to support the anticipated upturn, including improving fundamentals as the COVID-19 vaccine rollout picks up, low interest rates, and attractive pricing within those sectors that saw the most negative impact from COVID-19.

REIT magazine recently spoke with five fund managers to discover their strategies for navigating 2021 and the opportunities and challenges they see ahead.

After a year in which REITs underperformed the broader market, what do you see for 2021?

Keith Bokota: Overall, I have a favorable outlook. We saw a nice benefit from the vaccine announcement in November, and I think that increases the confidence in the forward economic recovery and ultimate return to normalcy.

We view the low interest rate environment as supportive of the group. Also, when we look at where the valuation levels are relative to bond markets or fixed income, we believe there’s a strong case for forward returns.

Brian Jones: We think there will certainly be opportunities for real estate stocks to perform well in 2021. A number of sectors were severely impacted by the pandemic. As the rollout of the vaccines continue and economic activity improves, and we begin to return more toward normal life, some of the sectors, such as retail, hotels, and the office sector—to a degree—may begin to see a recovery in their fundamentals. That could help lead to better performance within the REIT asset class as we move through 2021.

Lisa Kaufman: REITs finished 2020 with a strong rally but ended the year well below year-ago levels. At the same time, financial conditions have eased materially over this time frame, and fundamentals are bottoming or have bottomed in most sectors.

We believe the combination of repricing that’s already occurred, ultra-low interest rates, and improving fundamentals provides a very strong setup for REIT returns this year.

Jeff Kolitch: We are optimistic about the prospects for REITs. Much of real estate lagged in 2020, in part because the business models of several segments are based on the assembly of people. We expect this headwind to begin to reverse in the year ahead. In addition, several segments of public real estate are attractively valued relative to equity, bond, and private real estate alternatives.

We think real estate is at the doorstep, or the very early stages, of a new real estate cycle. And, REITs and real estate generally should be one of the prime beneficiaries of an improvement in economic conditions if, in fact, a large swath of the population is vaccinated over the course of 2021.

Jason Yablon: Just as REITs were disproportionately impacted by the pandemic in 2020, we also believe they’re poised to recover as vaccines get distributed across the country in 2021. We also think REITs tend to perform well in the early stages of a business cycle, where fundamentals are improving, and the Federal Reserve remains accommodating.

How has COVID-19 affected REIT returns?

Kaufman: It was especially challenging for property sectors that were reliant on social interactions—offices, hotels, retail—while the newer economy sectors that are not hubs of personal interaction, such as cell tower, data center, life science, storage, and industrial companies, produced strong returns.

Bokota: We found the strongest returns from data centers, industrial, storage, and single-family rental. Those sectors were less impacted by social distancing and saw demand actually benefit from the pandemic. On the other end, some sectors were more heavily impacted by social distancing, so you saw pretty severe demand declines or comparatively weaker collection activity.

Jones: The pandemic has impacted REIT sectors in different ways. Some have seen a severe decline in occupancies and a decline in cash flows related to changes in behavior. Hotels are generating very low occupancy rates as business travel has been severely curtailed. In addition, retail centers were closed for portions of the pandemic, and an outgrowth of the crisis has been a stairstep growth in e-commerce penetration.

Additionally, the work-from-home dynamic has left many office buildings less occupied by tenants, even though most are continuing to pay rent. There are some real questions as to whether the work-from-home trend will continue, even as the pandemic recedes.

Following what we saw in 2020, do you plan to make any adjustments to your investment strategy?

Yablon: We are always making adjustments driven by valuation, so what we focus on is getting our forward-looking view of national growth and value into our numbers, and we readjust as the valuation and/or the stocks move. We’re going to continue to adjust where we think we can generate the best returns for our investors, and that will be dictated both by whether our view of value changes, but also as stocks change.

Bokota: We’re largely maintaining the status quo. In recent years, we’ve preferred areas of the REIT market that are less sensitive to economic conditions. Industrial or wireless infrastructure or data centers are examples of that, and many of those preferences continue for us. But we have been looking for ways to include cyclicality into our portfolio as well, if we see those investment opportunities as offering attractive longer-term value. So, we’re being pretty selective and targeted.

Total assets chart

Kaufman: We are value-oriented investors, so our investment strategy is to maintain an up-to-date view of what we think fair value is for every stock we cover and to look for mispricing, and that strategy doesn’t change year in and year out. We’re going to continue to be nimble, to mine the valuation signals we see in our model and take advantage of the opportunities the market gives us.

Kolitch: We actively manage our real estate portfolios and will modify them if we believe it is prudent to do so. In the last four to five months of 2020, we reoriented some of our holdings and investment themes with an eye towards 2021 and 2022 and an expectation that economic conditions would improve as COVID-19 vaccinations are widely administered.

How is investor interest in ESG (environmental, social, and governance) issues affecting your investment strategy?

Jones: We have recently integrated ESG factors into our investment approach for the REIT market, so we pay close attention to the ESG factors that are most important to real estate. On the environmental side, those include green buildings and reducing greenhouse gas emissions. On the governance side, we pay close attention to the alignment of management compensation and to total shareholder returns. We pay close attention to board structure in terms of having a majority of independent board members, and we’re increasingly focused on diversity throughout a REIT’s employees, management team, and board of directors.

We score each of the REITs in our investable universe as it relates to ESG, and those scores influence our investment decisions and how we construct our portfolios.

Kaufman: ESG is an important area of focus across LaSalle’s platform, and appropriately so. Real estate has a major impact not just on the world’s carbon footprint but on the safety, comfort, and well-being of society at large, which presents the whole real estate industry with a lot of responsibility, but also a lot of opportunity to effect meaningful change.

ESG is factored into our company underwriting and is an important component of our assessment of a company’s fair value. We don’t redline companies that have weaker ESG scores, but we ascribe less value to them and more value to companies that have a thoughtful approach to environmental sustainability, take care of their employees and communities, and have sound governance. We think we can have an impact on company behavior through investment and through engagement, and we take that advocacy role seriously.

Yablon: We’ve always integrated ESG into our valuation process, and we continue to do so. Our focus is to try to capture it in our discount rate and in our valuation, to try to price it in as best we can.

Bokota: Our investment strategy has always been focused on investing in quality companies at reasonable prices. So, for us, ESG is an integral part of our process. We view quality as multidimensional, not just about asset quality or the locations of the assets, but it’s also inclusive of ESG considerations. Incorporating ESG factors into our investment process results in a more holistic approach to investment decision-making.

Which commercial real estate sectors do you think will perform the best in 2021?

Kolitch: We believe many of the laggards of 2020 will generate solid returns in the year ahead. This group may include certain apartment, office, retail, hotel, and gaming REITs. Data center REITs are benefiting from secular growth in the outsourcing of information technology, increased cloud computing adoption, and the growth in U.S. mobile data and internet traffic.

Wireless tower REITs are positioned to grow for several years as the demand for data intensive devices accelerates and new wireless technologies emerge. Industrial REITs should continue to benefit from robust warehouse demand, in part due to broader e-commerce needs.

Bokota: Our favorite sector for 2021 is residential—both single-family rentals and manufactured homes. We’re seeing increasing levels of demand, record-high occupancy levels, and strong pricing power as people look to get more space. They’re also still trading at very reasonable valuations. Other sectors to highlight would be wireless infrastructure and industrial, as we see continued strong tenant demand.

Jones: The single-family rental sector has benefited as young families in particular are looking for more space. Relatedly, REITs that own timberlands and, in many cases, manufacture lumber and other wood products, have also benefitted because their primary use is in new home construction.

Kaufman: We like the residential sectors—single-family homes, manufactured homes, apartments. We also like shopping centers, which I think is a bit contrarian today. We see good value in that sector following the underperformance of last year. We also see value in some of the sectors that have maintained pricing power and outperformed during the pandemic—cell towers, for example.

Yablon: We think fundamentals in the self-storage business are reaccelerating quite meaningfully as people continue to move around the country and repurpose their spare rooms, and therefore move belongings into self-storage. We also have a view that a lot of the sectors that have been negatively impacted by the pandemic will begin the recovery story. We think gaming, health care, high-quality malls, and net lease are attractively valued right now, but they’re also vaccine recovery stories.

Which sectors do you feel will face the biggest challenges in the coming year?

Jones: I would be cautious on hotels and office. For the hotel sector, travel is still very depressed, particularly business travel. We think that even as the vaccine rolls out, corporations will be conservative in terms of adding to their travel budgets. The story on leisure travel is a little more constructive in that many families haven’t had traditional vacations for the better part of a year, so we could see strong pent-up demand for leisure travel by the summer.

As it relates to office, the work-from-home dynamic and the good productivity that corporations have been able to maintain may encourage them to embrace aspects of remote work even when the pandemic recedes. If that is the case, this could serve as a moderator of office demand.

Kaufman: We think retail and office will be the most challenged. Lodging also faces a tough road to recovery. We’re expecting positive operating income growth, though, for all sectors by 2022. That includes office, lodging and retail, but we do think that the rate of growth will lag for the office sector.

Yablon: We continue to think that office will struggle. Even as the country becomes vaccinated, companies are thinking about their space needs and how to fulfill the needs of their employees, and I do think there will be a structural shift, where the percentage of people working from home will increase pretty dramatically, even in a post-vaccination world.

What are some of the key potential risks or headwinds to REIT performance in the coming year?

Bokota: A couple of areas we’re watching are the vaccine and the return to normalcy, as well as the continued aggressive stimulus, both fiscal and monetary. If we saw any cracks in those positives, I think that would be negative for all investment markets, including REITs.

The other thing is keeping an eye on interest rates. REITs have sometimes had poor relative performances if rates moved up too far too fast, even if rates were moving up because the economic environment is improving.

Jones: One thing to pay close attention to is the pace of recovery within real estate markets as the pandemic recedes. We would expect the sectors that have been hurt by the pandemic to begin improving in the second half of 2021, but there are certainly open questions about the pace of that improvement and some questions as to whether the pandemic has led to changes in behaviors that will endure even as the risks from the virus recede.

Kaufman: I think the biggest risk for REITs remains the virus. We’re very optimistic that science has prevailed here. We see the vaccines coming, but there’s risk that the process could be derailed by mutations of the virus or issues with the rollout or even the long-term effectiveness of the vaccines. In all likelihood, there will be some bumps along this path to recovery, and it will be uneven. We think some of the behavioral changes that have occurred during the pandemic may endure, and those will impact certain geographies or certain sectors longer than others.

Kolitch: A further reopening of the economy is critical to an improvement in occupancy, rent and cash flow growth, and return performance for several real estate categories. This will not happen overnight, but perhaps over the course of 2021 into 2022. If interest rates spike, certain real estate companies and segments could face headwinds and lose their relative appeal.

Yablon: Vaccine distribution is a key concern. We’re focused on virus mutation and if that will change the efficacy of the vaccine. Separately, some people consider higher interest rates as a risk, but from our perspective, if it is driven by improving economic activity, REITs can perform well in that environment, certainly on the back of a return-to-normal trade in a post-pandemic world.

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4 Quick Questions with NYU’s Dustin Jones

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4 Quick Questions with NYU's Dustin Jones Kyle Gustafson Apr. 12 2021
4 Quick Questions with NYU's Dustin Jones

The pandemic is accelerating the technology and innovation changes that were already starting to happen.

While Cornell University was shut down for in-person meetings during the pandemic in 2020, Dustin Jones said a bittersweet, virtual goodbye to his six years with students and his position as director of its Baker Program in Real Estate—but a joyful hello to a new life and job at NewYork University’s Schack Institute of Real Estate as academic director of U.S. graduate programs.

Has your diverse career background in law, real estate, and academia been helpful as you’ve begun your new role at NYU?

Yes, having had that industry experience as well as administrative experience, I bring both of those backgrounds to the table. What drew me to NYU and Schack is the fact that so many of the faculty are from industry. There are 12 of us who are full-time NYU real estate faculty, and then there are more than 100 adjunct faculty who teach but have full- time jobs in the industry. This is an ideal scenario for me.

What is Schack doing in terms of diversity, equity, and inclusion (DEI) programming?

We are looking at creating an affordable housing certificate. Some of the communities that have been most impacted by the pandemic have been communities of color, particularly in New York City where affordability has been an issue for a long time. I’ve also been talking with the director of the NYU Urban Lab, which Schack operates, about ways to engage historically Black colleges and universities (HBCUs) regarding urban development, inner-city development,  and ways to improve communities and economic development.

What are some methods REITs should be looking at to increase diversity in the industry?

Dustin Jones of NYU Schack Institute
Dustin Jones

With respect to their investment strategy, REITs should clearly catalyze teams that look at communities of color where they can invest. Oftentimes those communities are overlooked as investment opportunities. The REITs that focus on urban areas and on inner-city development recognize the value proposition there.

Folks that are in positions of power, authority, and influence within their organizations need to have the conversations about increasing diversity and need to make it a priority. If there’s a metric that we look at every year, then we can improve it.

What changes are you seeing within real estate industry careers?

Some of the most lucrative or the most popular areas involve technology to change the way we live, work, and play. Over the past 10 years, every conference it seemed that I went to included discussions about disruption. The pandemic is probably the most disruptive thing that has happened to commercial real estate in at least a few generations. It’s accelerating the technology and innovation changes that were already starting to happen.

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