U.S. REITs are increasingly focused on capital recycling programs, selling off non-core properties and using the proceeds to improve the quality of their portfolios through redevelopment and acquisitions. In fact, REITs accounted for nearly a fifth of all acquisition activity in 2011—the highest percentage in more than five years, according to Real Capital Analytics.
“REIT management teams are taking a much more active role in managing their portfolios through acquisitions and dispositions,” says Alexander Goldfarb, managing director of Sandler O'Neill + Partners LP.
While recycling programs are commonplace in the REIT industry, activity has increased substantially since the credit crisis. “One of the takeaway lessons from the credit crisis was that if you can sell assets that do not fit your purpose you should do so,” Goldfarb says. “REITs realized that they tended to hold onto too many assets.”
The credit crisis cemented the theory that higher quality assets tend to withstand difficult economic conditions better than lower quality assets. During crunches, lenders only provide capital for the best assets. As a result, “owners are not going to get full value for lower quality assets–they’re less valuable to lenders—and they’re probably going to be more impacted by an economic downturn,” Goldfarb says.
Indeed, REITs have a hard time parting from their assets regardless of their quality, Goldfarb notes, adding that they want to hang onto their properties because of the net operating income they provide. “Recycling programs are easy to announce, but they’re a lot harder to implement,” he says. “When you sell assets, you lose income, so unless you can replace the assets quickly, your earnings are going to take a hit. That’s usually why we don’t see REITs sell more assets.”
Analysts point to Vornado Realty Trust (NYSE: VNO) as one of best examples of a REIT that has not been disciplined in trimming non-strategic assets from its portfolio. Over the past 10 years, the company has acquired $15.9 billion worth of assets and generated on $2.2 billion in proceeds from dispositions. Over the past16 months, however, Vornado has disposed of $694 million of assets.
In a letter to shareholders filed with the SEC, the REIT’s Chairman Steven Roth admitted that the REIT needed to refine its strategy. He promised to trim non-strategic, non-geographic assets from our strip shopping center portfolio to recycle capital; redefine its New York business segment; and harvest, divest, and sell all non-core assets (Toys “R” Us included).
Retail REITs most aggressive
Retail REITs have been among the most aggressive in their capital recycling efforts. In early April, for example, Weingarten Realty Investors (NYSE: WRI) executed on its previously announced plan to exit the industrial sector by selling all its industrial holdings to DRA Advisors LLC.
The Houston-based REIT is selling the 9.6 million-sq.-ft. portfolio, which is comprised of 52 properties in Florida, Georgia, Tennessee, Texas and Virginia, for $382.4 million. That sale price represents an 8 percent cap rate.
“The sale of this portfolio demonstrates our commitment to the company’s capital recycling initiative,” Weingarten President and CEO Drew Alexander said in a statement. “It is a significant step toward the strategic exit from industrial real estate, further strengthening our position as a pure-play retail REIT.”
Weingarten says the proceeds from the transaction will be used to pay down amounts outstanding under its revolving credit facility and repay a $200 million unsecured term loan, resulting in a further strengthening of the company’s balance sheet and providing additional capacity to fund growth opportunities in its core retail markets. The REIT’s retail portfolio consists of 313 neighborhood and community shopping centers located in 23 states.
Like Weingarten, Kimco Realty Corp. (NYSE: KIM) has also been actively selling assets. However, the New Hyde Park, N.Y.-based REIT also has added to its portfolio.
Since 2010, Kimco has sold 53 non-core retail assets totaling $289.3 million, including 31 in 2011. Proceeds from the 2011 sales were quickly put to work with the acquisition of 10 properties in core markets for an aggregate purchase price of $204 million.
“We are committed to continuing to sell our nonstrategic shopping centers, which will upgrade our portfolio and permit us to concentrate on superior properties in our core markets,” said Kimco President and CEO Dave Henry during the REIT’s most recent earnings call.
The REIT plans to dispose of another $250 million worth of non-strategic properties this year, in addition to about $250 million in non-retail properties. And, it’s off to a rollicking start-during the first quarter 2012, it sold 15 shopping centers during the first quarter for $215.4 million. Of that total, 13 properties totaling nearly 1.2 million square feet were considered non-strategies properties.
Last year, Kimco acquired 17 retail assets in its core markets. This year, it’s already purchased a handful of properties including Woodbridge Shopping Center in suburban Houston and Bell Camino in suburban Phoenix for an aggregate price of $17.4 million.
“The recycling process both continues and will be continuous,” said Kimco’s COO Mike Pappagallo during its most recent earnings call. “This is not a one-shot initiative. And the asset decisions are driven by each regional president's assessment of their own portfolio strengths and weaknesses.”
Pappagallo points to the REIT’s Southeast and Florida region: in 2011, Regional President Paul Puma and his team sold 10 properties with five more dispositions slated for the first half of 2012. Combined, the properties represent about 1.2 million square feet and $8 million of net operating income. The total sale proceeds of $95 million have partially funded the $133 million of the region's purchase of new centers that will generate about $9.5 million in NOI, he adds.
Pappagallo explained that Kimco’s portfolio will expand and contract over time. “If you move beyond the straight white line about what's strategic, what's nonstrategic–the more important dimension to understand about where we are coming from is that recycling will be an ongoing part of the landscape going forward,” he said. “We are not simply accumulating for accumulation's sake. Size does have advantages. But it's not the be-all and end-all. And we've really started to think more aggressively about how we create the optimal portfolio, not the largest portfolio.”