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Feature Article, June 2006
REITs Create New Growth Strategies
In order to remain competitive in the retail marketplace, many REITs are changing their strategies and incorporating new property types into their portfolios.
Lara Fuller
As opposed to other investment vehicles, REITs are known for their stability and solid returns, even during ups and downs in the economy. Now comfortable in their role as a relatively secure investment, many retail REITs are beginning to shake things up a bit. Many companies are making significant changes — from altering their growth strategies to experimenting with new property types. Shopping Center Business recently took a closer look at five prominent REITs to get their take on the market and see what changes they have in store.
The Current Market
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Developers Diversified continues to do ground up development. Pictured is Midtown Miami, a project that will open later this year.
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The REIT market, as a whole, is doing very well at the moment. “REITs continue to be very healthy,” says Stephen Lebovitz, president of CBL & Associates Properties in Chattanooga, Tennessee. “Stock performance for us, and most of the others in the mall universe, has been fairly stable.”
Adds Doron Valero, president and chief executive officer with North Miami Beach, Florida-based Equity One, “REITs are doing very well. If you look at our group, occupancy rates are up, retail sales are up and retail interest is up. The environment, despite interest rates, is as good as ever.”
Much of the growth in the REIT industry can be attributed to the shift of investors away from dotcoms after the bursting of the tech industry bubble several years ago. Investors began looking for a more secure investment and the REIT sector was able to provide that security. “Over the past 5 years, REITs have benefited from strong performance,” says Martin ‘Hap’ Stein, chairman and chief executive officer with Jacksonville, Florida-based Regency Centers. “Well-run companies are performing well and investors appreciate the transparency. Since the tech bust, investors want to invest in hard assets with good records.”
Steps Towards Transformation
The attention that the REIT market has received in recent years is changing the way investors view the companies and the way the companies view themselves. “REITs are going through a fascinating evolution,” says Kenneth Bernstein, president and chief executive officer with Acadia Realty Trust of White Plains, New York. “We are seeing companies evolve into more well-rounded, value-added enterprises that can create value above and beyond just owning and holding a basket of properties. The capital markets are beginning to embrace REITs as a proxy for real estate and are beginning to reward value-added REIT management above and beyond their basket of assets.”
New development, in both retail and mixed-use, is becoming a focus for many REITs, while others are looking at joint venture partnerships and consolidation. “Long term, REITs will perform well,” says Stein. “The current performance, however, is not realistic. Changes will have to be made.” Whatever the strategy, it is obvious that the traditional REIT is maturing into a new type of company.
Strategies
A revamping of strategy is necessary in the ever-competitive REIT marketplace. As trends in both investment and development change, it is important for REITs to keep up and look beyond the traditional retail center. Developers Diversified, CBL & Associates, Equity One, Acadia Realty Trust and Regency Centers are all evolving, but through different means.
Developers Diversified
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Developers Diversified has purchased a number of its joint venture partners’ shares of existing centers, including Lehman Brothers’ share of Paseo Colorado in Pasadena, California.
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Beachwood, Ohio-based Developers Diversified Realty has a three-pronged strategy to build external growth for its shareholders. The company is acquiring stabilized properties, looking for redevelopment opportunities for its Coventry II Fund, and has an aggressive ground-up development program comprised of 15 million square feet, valued at $1.7 billion. New development is also an important part of its growth strategy. To raise funds for development and new acquisitions, the company has selectively sold non-core assets that no longer make sense for the REIT to own. It has also created a merchant-build program that develops projects on balance sheet. Certain assets of that program will go to MDT, the Australian property trust that Developers Diversified co-sponsors with Macquarie Bank.
“The advantage of placing assets with MDT is that it allows us to recognize the merchant build gain and maintain long term control of high-quality assets. We also receive property management, asset management and other fees from the trust,” says Joseph Padanilam, senior vice president of acquisitions and dispositions for Developers Diversified.
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Joseph Padanilam, senior vice president of acquisitions and dispositions for Developers Diversified Realty.
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The current climate of low cap rates and competitive pricing has driven Developers Diversified away from any one-off acquisitions thus far in 2006. Instead, the company is buying out its venture partners in several centers, including Lehman Brothers’ share of its Paseo Colorado urban retail center in Pasadena, California, in January. Developers Diversified also purchased DRA Advisors’ share of Deer Valley Towne Center shopping center in Phoenix.
“In many ways, our joint ventures give us an acquisition pipeline,” says Padanilam. “In this investment climate, we can negotiate off-market deals with our joint venture partners that made sense for both parties. In buying someone else’s property, there is always that element of the unknown. In these properties, we know what is going to happen because we’ve been operating them and that leads to a very smooth transaction.”
CBL & Associates
CBL & Associates went public as a REIT in 1993. Since that time, the company has focused on building a portfolio of regional malls and large open-air centers. The company currently has 79 properties in 27 states, with most of its portfolio located in the Southeast.
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Stephen Lebovitz, president of CBL & Associates Properties.
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Though the company’s existing strategy has served it well over the past decade, CBL is now looking to move in a different direction. “We’ve shifted our growth strategy to emphasize more new development because of the slowdown in the acquisition market,” says Lebovitz. “Over the past couple of years, we have bought over $1 billion in malls, but this year we don’t anticipate that kind of volume.” The company is now putting emphasis on its development program. CBL currently has more than 2 million square feet of new development in the works, valued at approximately $300 million. “And we are now working to grow even further than that,” says Lebovitz.
In order to further its new strategy, CBL is also adding other property types to its previously all-retail portfolio. “We focus on retail, though we are integrating some mixed-use into developments,” says Lebovitz. “We’ve typically had residential, hotels and sometimes office on the periphery around the property. We are now looking to more closely integrate these uses into our projects.”
The areas of the country in which CBL is most actively working include Florida, the Carolinas and Texas. The company also has projects underway in Oklahoma, Michigan and Pennsylvania.
As for the future, CBL believes its updated strategy will serve it well. “CBL has a bright future,” says Lebovitz. “We have positioned ourselves well to participate in the consolidation as a means to grow our company and to grow the value to our shareholders.”
Equity One
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Equity One recently purchased Piedmont Peachtree Crossing in Buckhead.
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Like many other REITs, Equity One is taking note of the mixed-use trend. The company recently purchased several traditional centers that it is in the process of converting into mixed-use developments. Included in these recent acquisitions is the Publix-anchored Young Circle shopping center in Hollywood, Florida, and a Kroger-anchored center in the Buckhead area of Atlanta. “We believe that mixed-use, especially in urban areas, is the way to go,” says Valero. “Land is scarce. The trend is there and it will continue to grow.”
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Doron Valero, president and CEO, Equity One.
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In the past, Equity One, a public company since 1992, has primarily focused on the Southeast region, particularly Florida. “We want to continue to be the dominant grocery-anchored shopping center owner in Florida, but we also want to increase our presence in the Northeast,” says Valero. Equity One has approximately 150 properties in Florida, Georgia and the Carolinas. As a part of the company’s new strategy, Equity One recently completed a joint venture and sold 80 percent of its Texas portfolio, diverting the funds to the Northeast. The company now has seven properties in Boston and Connecticut. Other areas that it is looking to expand include Philadelphia and New Jersey.
In order to achieve its goals of expansion, the company is starting with consolidation. “We want to increase our size and identify opportunities for consolidation,” says Valero. “We want to be known as a consolidator. The opportunities will be there. We are now set up to identify them and then execute.”
Acadia Realty Trust
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Acadia Realty Trust’s Abington Towne Center in Abington, Pennsylvania.
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Acadia was formed in mid-1998, when it took over a troubled shopping center REIT called Mark Center Trust. Since that time, Acadia has primarily focused on open-air retail centers in high barrier to entry markets. The company currently has approximately $2 billion in property under management, mainly in the Northeast and Mid-Atlantic.
“Our strategy, while always remaining retail-focused, is also evolving,” says Bernstein. “A few years ago, when we saw that shopping centers were undervalued, we were aggressive acquirers of existing centers because the value proposition was compelling. At this point in the cycle, we have felt that generic centers, especially secondary ones, are overpriced.”
The company is now focusing on value-added opportunities in two areas: retail and mixed-use redevelopment in urban markets and the purchasing of valuable embedded real estate from retailers. In terms of redevelopment, Acadia has invested its time and money in the New York City market. “National retailers are recognizing the huge opportunity in the five boroughs of NYC and are willing to make extraordinary compromises in order to establish a footprint,” says Bernstein. Acadia currently has more than $300 million in redevelopment projects in the pipeline.
The second aspect of Acadia’s growth strategy involves acquiring established properties. The company has been able to do that through joint venture partnerships, including one with Klaff Realty and their long term partner, Lupert Adler. “In that venture, we are part of the group that purchased Mervyn’s 2 years ago, which has been an extremely successful venture,” says Bernstein.
Over the next few years, Acadia plans to continue to focus on the New York area, but also the Chicago, Boston and Philadelphia markets as well. “We acquire when it makes sense to acquire and redevelop when it makes sense to do that,” says Bernstein. “We use our core skills to focus on the areas that we think will provide superior risk adjusted return. If we do that, we can provide superior earnings growth to our shareholders and more exciting properties for our tenants.”
Regency Centers
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Regency Centers’ Kleinwood Center in Houston.
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With more than 380 centers, totaling approximately 50 million square feet, Regency Centers has long been one of the leading owner/operators of neighborhood shopping centers. The company was founded in 1963, went public in 1993, and now has 20 offices across the U.S. Though the company is known for its strong performance, Regency, like many other REITs, is altering some aspects of its strategy to keep up with the changing marketplace. “More and more mixed-use properties are being developed across the country,” says Stein. “The interest in mixed-use is a big trend and as we do more infill, that infill will end up being mixed-use.”
In addition to adding mixed-use centers to its portfolio, Regency Centers is also focusing on joint ventures as it moves forward over the next few years. “One of our goals is capital recycling and joint ventures,” says Stein. “We are looking to reinvest capital into new acquisitions and development.” Some of the company’s biggest joint venture partners include CalSTRS and Macquarie CountryWide Trust of Australia. Regency’s goal in the coming years is to grow its joint venture portfolio by more than $1.5 billion.
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Rendering of Regency Centers’ Shops at Highland Village, a new lifestyle center that the REIT is developing in Texas.
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In the future, Regency hopes that by focusing on development and joint ventures, it will be able to remain at the forefront of the shopping center industry. The company is currently on track to average 3 percent growth over the next 8 years. “In terms of future development, we are planning to create state-of-the-art centers,” says Stein. “We want to own and operate high quality centers with good demographics and good, strong anchors. We have started $1.5 billion of new development and plan to complete another $1.5 million of new development over the next few years.”
The Future of REITs
In order for REITs to continue their reign in the investment markets, change is a necessity. “There will be an evolution in REITs where the current management teams evolve away, in a maturity process that REITs are going through,” says Lebovitz.
REITs will have to learn how to adapt in order to compete with the wide variety of funded companies in the market. For some companies, adapting will possibly mean mergers and consolidation. Says Lebovitz, “There will continue to be consolidation in the REIT sector in general, as certain companies have a more difficult time generating growth opportunities.”
The REITs that remain will have to continually revamp to remain competitive. “REITs will have to learn how to use leverage more effectively than in the past,” says Bernstein. “Also, they will have to use value-added joint venture structures so they can leverage off of their own expertise and capital. If they do that, they will over time present a very attractive investment alternative to private partnerships because of increased transparency and increased liquidity.”
©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.
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