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Real Estate

NAREIT conference speakers see present by looking at changes over past 20 years

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Equity Group Investments' Sam Zell: “That sucking sound you hear is capital being repatriated to the emerging markets.”

Much of the action at REITWorld took place outside of the main meeting rooms, but there still was plenty for the nearly 1,000 attendees of the 2013 “Annual Convention for All Things REIT” to chew on.

Many speakers at the annual conference of the National Association of Real Estate Investment Trusts, in San Francisco, addressed the changes from 20 years ago, when the industry was just starting to broaden its appeal to institutional investors from purely retail.

Only 27% of REITs that were public companies 20 years ago are still around now, said Richard Campo, chairman and CEO of Camden Property Trust, Houston, speaking during a lunchtime panel discussion on Nov. 13. The rest went bankrupt, merged, were acquired or were taken private, Mr. Campo said.

“It's about adaptability, (and) not just to market conditions,” Mr. Campo said.

In the beginning, REITs were not exactly “good public stewards,” he explained. REIT executives then thought of themselves as general partners and their investors as limited partners “where limited partners did not have a voice,” he said.

Since then, REITs have changed their governance structure and disclosure.

REIT executives now act more like the stewards of shareholders' capital, said Martin “Hap” Stein, Jr., chairman and CEO of Regency Centers Corp., Los Angeles, who spoke on the same panel.

About a quarter of REITs are owned by exchange-traded funds, said Robert Steers, CEO of New York-based Cohen & Steers Inc. Mr. Steers spoke on the same panel as Messrs. Campo and Stein.

“ETFs revolutionized the industry, put pressure on us to stay ahead of the changes,” Mr. Steers said.

He predicted REITs will see significant inflows from DC plans through real asset sleeves of target-date funds.

In the last 20 years, “there's been a lot of capital into this group,” Mr. Campo said. “I tell my employees that we do three things: We produce jobs, and we produce more income for shareholders, and retirement income for people owning our stock ... especially if you do the right thing and stay transparent.”

One of the keys for success for REITs is to pay attention to what happened to those that aren't around anymore.

“Keep it simple,” said Mike Kirby, chairman and director of research for Green Street Advisors Inc., Newport Beach, Calif., speaking on the same panel. “Be excellent in finding the opportunity. Be excellent in the execution, but don't mess it up.”

Indeed, what got REITs into trouble during the recession was excess leverage, Mr. Kirby said.

Green Street is a real estate and REIT research firm.

“By the time the trouble hit, all of the value created in the good times was wiped away,” he said. “Whatever you think the right leverage is, it is a lot lower.”

One REIT sector that has seen tremendous recent growth is the net-lease arena. Net-lease properties rely on a single tenant. Net-lease REITs have doubled to account for 6% of the FTSE NAREIT index from 3% in 2010, noted Todd Stender, vice president, equity research REITs, and senior analyst, Wells Fargo Securities LLC, San Francisco, who moderated a panel on net-lease REITs.

Currently, net lease is not a separate REIT category but Mr. Stender said that because of the growth of the sector, he believes net-lease REITs will become a single category in the near future. Net-lease REITs are expected to grow to up to 11% of the index in the “next couple of years,” he said.

Panel speaker, Nicholas Schorsch, chairman and CEO, American Realty Capital Properties Inc., which has acquired two other net-lease REITs recently, said he anticipates $50 billion of properties will be coming to the net-lease market from non-traded REITs that will need to liquidate portfolios.

Non-traded REITs have to sell their assets after a certain period of time, called a “liquidity event,” but many non-traded REITs might be shortening this time period because of increased scrutiny by regulators, Mr. Schorsch said.

“They will find liquidity with us (listed REITs) or Blackstone (Group) or event-driven guys,” he said. ”It's a lot of assets that could double the industry.”

Zell speaks

One of the highlights of the conference was a speech by Sam Zell, Chicago-based chairman of Equity Group Investments, Equity Lifestyle Properties Inc. and Equity Residential, who compared where the industry is now with where it was 20 years ago, when he first spoke at the NAREIT conference.

In between retelling the same off-color joke that still can't be printed today and railing against President Barack Obama's administration to an appreciative audience, Mr. Zell explained why he is a booster for investing in the emerging markets.

“That sucking sound you hear is capital being repatriated to the emerging markets,” Mr. Zell said. “Today, money is worth dramatically more in those places than it was three years ago. I want to invest where people will pay you for the use of your money better than anywhere else.”

But he did sound a note of caution. Although his companies were first into China, he said, that country now is not a place to invest. “There is too much liquidity,” he said.

Instead, Mr. Zell said his companies are very active in Brazil and Colombia.

“(Colombia) is an example of when you have a free-trade agreement. Multinationals are making Colombia their headquarters,” he said.

In the past in Brazil, “private equity guys were standing on the side of the road trying to hand out money,” Mr. Zell said. Today, Mr. Zell said he is building one of Brazil's first public-storage company.

This article originally appeared in the November 25, 2013 print issue as, "NAREIT conference speakers see present by looking at changes over past 20 years".