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Arden Realty's shares are 51.2% overvalued, with fair value at $30.24. The weekly chart profile is overbought with the five-week MMA at $42.93. My quarterly value level is $41.98 with the 52-week high set on Friday at $45.80. There are no risky levels for ARI, so additional new highs are feasible. Crescent's are 44% overvalued with fair value at $14.14. The weekly chart profile is positive with the five-week MMA at $20.02 and the 52-week high at $20.82. My annual value level is $16.16. General Growth Properties shares are 140.5% overvalued with fair value at $18.55. My annual value level is $28.45. Shares were recently trading at $45.05. Macerich shares are 53.1% overvalued with fair value at $43.65. The weekly chart profile is positive with the five-week MMA at $63.91 and the 52-week high at $71.22. 3. My annual value levels are $45.33. Shares were recently trading at $66.68. Public Storage shares are 42.7% overvalued with fair value at $49.14. The weekly chart profile is positive with the five-week MMA at $66.37 and the 52-week high at $70.60. My semiannual value levels are $61.09. Shares were recently trading at $70.04. Shurgard Storage Centers shares are 57.4% overvalued with fair value at $36.86. The weekly chart profile is positive with the five-week MMA at $55.12 and the 52-week high at $59.30. My semiannual value levels are $48.31. Shares were recently trading at $57.88. Simon Property Group shares are 54.7% overvalued with fair value at $49.90. The weekly chart profile is positive with the five-week MMA at $72.43 and the 52-week high at $80.97. My semiannual value levels are $69.29. Shares were recently trading at $76.99. Taubman Centers shares are 62.3% overvalued with fair value at $21.29. The weekly chart profile is positive with the five-week MMA at $32.50 and the 52-week high at $36.34. My semiannual value levels are $32.02. Shares were recently trading at $34.76. Ventas shares are 64.6% overvalued with fair value at $19.26. The weekly chart profile is positive with the five-week MMA at $30.74 and the 52-week high at $32.70. My semiannual value levels are $30.98. Shares were recently trading at $31.99.
1 Image Is Everything Retailers are tailoring their advertising, merchandise and store formats to shoppers who want a more upscale experience. Macy's, a unit of Federated, is focusing less on coupon promotions and more on national, image advertising. Macy's locations are getting wider aisles, prominent in-store guidance signs and sofas, and television sets in dressing rooms. And it's not just department stores that are getting makeovers. Limited's Bath & Body Works chain is continuing efforts to transform itself from a seller of soap and fragrances to an affordable beauty boutique with an apothecary atmosphere. This holiday season, jewelry retailer Zale launched an ambitious campaign to shed its image as a promotions-driven mall store and market itself as an upscale, image-conscious jeweler. Even Wal-Mart has put together an effort to siphon away more upscale shoppers from Target and Costco. The discounter is improving its offerings in women's apparel, crafting "lifestyle" ads for both television and less conventional outlets such as Vogue magazine, and designing stores that appear less crowded and cluttered. "There are emotional drivers and social drivers of this trading-up phenomenon," says Neil Fiske, chief executive of Bath & Body Works. "Taking care of yourself is one. There's [also] a whole trend behind [upgrading] the home." 2 M & A - The Big Get Bigger A consolidation and buyout wave has hit many of the sector's largest players. The reasons: Many retailers are battered by competition and need a partner to expand advertising and help them gain clout with suppliers. Some are feeling pressure from Wal-Mart even though their sector remains stable. Federated's purchase of May Department Stores has combined the Macy's, Bloomingdale's, Marshall Field's, Lord & Taylor and Filene's department-store chains. Private-equity firms took private Neiman Marcus and Toys "R" Us in separate deals. Upscale retailer Saks has sold parts of its empire. And grocer Albertsons, battered by Wal-Mart's storming of the industry, has fielded a bid from Kroger. Some experts see the merger-and-acquisition activity continuing for several months or years as more shakeout happens in the industry and private-equity firms eventually look to flip their retail acquisitions for a profit. 3 Lifestyle Centers Open-air pedestrian walkways, dozens of small merchants, no large anchor store. Developers are embracing this format, known as the lifestyle center, as the replacement for outdated enclosed malls. "There isn't going to be this one super-regional mall model that everyone" constructs, says Mr. Stanek. "Consumers have said that rather than going into a one-million-square-foot mall, they're more interested in getting to specific stores." The International Council of Shopping Centers says there are currently 132 lifestyle centers in the U.S. that total nearly 50 million square feet. That's still small next to the 951 million square feet of enclosed mall space in the U.S. Still, more than 60% of the lifestyle-center square footage has opened since 2000. And 52 more lifestyle centers -- totaling 7.3 million square feet -- are under construction, according to the council. Developers often build lifestyle centers in upper-income communities where older, upscale shoppers will be drawn to typical lifestyle-center tenants: Williams-Sonoma, Barnes & Noble, Borders, Gap, Bath & Body Works, Pottery Barn and Victoria's Secret. Taking the trend a step further, some developers are building so-called retail districts -- which combine office, retail, residential and open spaces -- on the sites of demolished older malls. Continuum Partners' Belmar development in the Denver suburb of Lakewood, proposes one million square feet of retail space in the lifestyle-center format, 900,000 square feet of office space, nine acres of parks and 1,300 homes. Belmar would sit on the 104-acre site of Lakewood's former Villa Italia Mall. "Once the retailers learn they can survive without the department store," says Mark Falcone, Continuum's CEO, "they move into more unconventional formats like these multilevel retail districts." 4 Service & Installation Adds Sales In the continuing quest for higher sales per square foot and, consequently, better profits, retailers have started offering services complementary to their merchandise. Electronics retailer Best Buy last year ramped up its Geek Squad service for fixing home electronics. Circuit City Stores added in-home installation services this year. Home Depot and Lowe's have added installation services for merchandise such as window blinds. The trend aims to boost same-store sales, or sales at stores open at least a year -- a key retail measure. Such growth carries high margins because the gains are made against fixed costs. "I have no change in [floor space], and I'm not offering any additional product, but I can really start to get my sales per square foot up" by adding services, says William Cody, a lecturer on retailing at the University of Pennsylvania's Wharton School. "That's what Wall Street likes to hear." 5 Diverse Stores & Merchandise Lines - Something for Everyone With shoppers showing less patience and loyalty to a given store or apparel concept, more retailers are developing a stable of diverse stores and merchandise lines. The thinking: If you appeal to a range of shopping genres, at least one of your concepts is bound to be in favor at any given time. "We're seeing concepts get going, move up to critical mass and decline much faster than they used to," says Retail Forward's Mr. Stanek. "This brings the necessity of major specialty-store operations having an entire portfolio of concepts." Gap, a pioneer in the trend of multiple store concepts with its Gap, Banana Republic and Old Navy chains, this year unveiled Forth & Towne, an apparel store aimed at women over 35. Women's apparel chain Chico's FAS Inc. operates its namesake stores as well as White House/Black Market stores for monochrome apparel and Soma stores for intimate apparel. Retailer Abercrombie & Fitch Co. has apparel concepts covering most ages: The Abercrombie & Fitch brand for its core teen shoppers, Hollister for high-school shoppers, Ruehl for college and postcollege shoppers and Little A for kids. 6 Growth in Private Lable Sales Private-label merchandise, the in-house brands of retailers, will continue to absorb more of the market. The growth is partly a product of retailer consolidation and partly due to the low prices retailers can put on private-label goods while still reaping high margins. It also allows retailers to keep their suppliers of name-brand goods in check when it comes to pricing. Private-label goods accounted for 17% of all global sales -- measured in dollar value -- in the fiscal year ended April 30, up from 15% two years earlier, according to ACNielsen. 7 Shopping Should Be Fun Shoppers go to certain stores as much for the entertainment as for a purchase. And the quality and extent of that entertainment is improving. Sporting-goods retailers such as Dick's Sporting Goods and Recreational Equipment now feature climbing walls in their stores. Outdoor-gear sellers like Cabela's and privately held Bass Pro Shops host exhibitions on fishing, hunting and dog training. Hardware chains offer how-to classes on site. Nike's Niketown stores host professional athletes for autograph sessions. Mega-retailers are paying attention. 8 Increased Media Exposure Retailers are extending their marketing reach by underwriting, launching and owning various media channels. Some have introduced their own magazines. Craft retailer Michael's publishes a magazine titled Create. Other retailers are sponsoring television shows or creating their own. Home Depot sponsors TLC's hit home-decorating program "Trading Spaces." Cabela's sponsors the "Americana Outdoors" and "Fishing & Hunting Texas" shows. And it compiles video clips mailed in by customers for its "Memories in the Field" and "Outfitter's Journal" programs. Wal-Mart is supporting a reality-TV show in which high-school students compete for college scholarships. 9 Moving Out of the Mall As retailers increasingly discover they can thrive outside a mall setting, many are jumping to lifestyle centers or smaller, open-air shopping centers or going it alone entirely. Department stores J.C. Penney and Sears, traditionally a mall anchors, have established several free-standing stores. Part of the impetus comes from the success of Kohl's, which has expanded primarily with standalone stores. In 2004, jewelry retailer Zale began an aggressive push into off-mall locations such as strip centers and lifestyle centers. It opened 25 Zales the Diamond Store Outlet locations in its 2004 fiscal year. Why the exodus from the traditional mall? "One of the reasons is because mall traffic has declined," says Ed Fox, a professor of marketing at SMU. "Supplying retailers in malls is a lot more costly than retailers in strip malls and standalone locations, where they are easier to resupply because they have a dock in the back." 10 Tracking & Serving Customers Many retailers, especially grocery stores, are improving the way they track customers' purchases -- and how they reward those customers. "You're going to see retailers, particularly the grocery companies, do more with the data they gather from customers," says Mr. Fox. "They're going to give you a special discount or give you more information about what you bought or what's on sale." As Wal-Mart further tightens its grip as the largest U.S. grocer, chains like Kroger will respond by improving their discounts for repeat customers. And other retailers are honing their use of customer-provided data for marketing. Diamond retailer Zale says in its annual report that it intends to build a base of "predictive customer data" to better craft marketing for those of its 19 million customers who "demonstrate a high propensity to respond."
It's too soon to tell whether the moves will help pull grocers out of their slump. Sales at the nation's largest grocery chains have been slow and profits inconsistent for most of the past several years. Here are some of the major trends in the grocery aisle. 1 Stores are Leaving the Middle Market Supermarkets are moving up and down market to set themselves apart from a wave of nontraditional competition that has stolen the middle. To reposition itself as an upscale chain, Safeway, the nation's third-largest traditional supermarket company, invested $100 million in a massive advertising campaign this year and millions more in store remodeling over the past several years. It is building so-called lifestyle stores -- sophisticated shops with better-quality produce, softer lighting and classes in skills like flower arranging. New advertising is attempting to brand the experience of shopping at Safeway the same way consumer packaged-goods companies brand their products. Southern retailer Winn-Dixie also is nudging its stores toward the higher end. Other grocers are dabbling in new formats that sell cheap goods to capture the low end of the market. Albertson's, the nation's second-largest traditional grocer, last year created a subsidiary that runs limited-assortment stores with low prices under the Super Saver banner. Great Atlantic & Pacific Tea Co., has been shedding stores so it can focus on two different formats: upscale fresh stores and discount locations. 2 Nontraditional Grocery Formats Drugstores, big-box discounters and even hardware stores are adding more food, especially fresh groceries, and increasing pressure on traditional grocers to protect their turf. A decade ago, nontraditional grocery formats accounted for 8.9% of total grocery sales, according to Willard Bishop Consulting. Last year, they accounted for 31.9% of grocery sales. Food has narrow profit margins, but retailers are adding it because it brings customers into stores more frequently. The hope is that shoppers also pick up bigger-ticket items. Target is more than doubling its food offerings in new and remodeled general-merchandise stores and adding refrigerated coolers. By January, Home Depot plans to open convenience stores in parking lots of four of its home-improvement outlets in Nashville; the stores will sell milk and prepared breakfast and lunch foods. 3 The Center Shrinks & the Periphery Grows Grocery sales have sagged the most in recent years in the so-called center of the store -- those middle aisles filled with laundry detergent, toothpaste, garbage bags and cooking staples. Driving this loss of revenue: the discount stores and changing culinary habits. "People don't shop the center as much as they used to," says Peter Lynch, chief executive of Winn-Dixie. "It's because the aisles haven't changed for 30 years." In response, grocers are shrinking the display space in the centers of their stores and fattening the periphery. All around the edges of stores, where prepared foods and fresh produce have traditionally been located, consumers are finding more space devoted to ready-to-eat meals and better produce. Whole Foods Market is leading the industry, adding more prepared dishes from wood-burning pizza ovens and stir-fry stations. But other chains are starting to catch up. Winn-Dixie is paring its center and resurrecting sandwich bars. Packaged-food makers, which traditionally stocked the center of the store, are moving to the periphery as well to make sure they don't miss the sales shift. H.J. Heinz is creating new refrigerated potato and macaroni dishes. 4 Every Day Low Prices Trend Grows - Specials Shrink Kroger, the nation's largest traditional grocer, has spent the past four years funneling cost savings into lower prices in order to narrow the gap with discount stores. Some grocery chains are also moving away from weekly specials in favor of lower everyday prices, especially on items that consumers buy frequently. Shoppers used to plan their purchases around the specials advertised in grocery circulars, giving supermarkets incentives to offer new deals several times a month. That strategy has become less effective now that Wal-Mart, Target and Costco have started luring customers with consistently low prices. The consulting firm A.T. Kearney is advising traditional grocery clients to switch to what it calls a "no insult" pricing and promotions strategy. That means coming close to, but not necessarily lower than, discount-store prices on items that consumers know they can get cheap if they shop around. 5 Fast Pay Grocery chains are adding high-tech payment systems that allow shoppers to check out with an identification number and the touch of a finger. Some chains have installed a system that identifies customers with a scan of their finger. The scan picks up a series of data points from the physical shape of the finger, not a fingerprint. Customers sign up for the program by scanning their finger and registering their credit or debit card. Then they choose an ID number, usually their phone number. The next time they come back, their finger and ID number will log them in to the payment system. 6 Slotting Fees May Dissapear Grocers are slowly moving away from a practice that has long been standard in the industry: charging product makers for shelf space and levying other promotional payments. Wal-Mart set the example. Now Safeway has stopped taking vendor allowances from some manufacturers. "It takes a lot of cost out of the system," Steve Burd, chief executive of Safeway, told an investor conference in March. "There would be somewhere between 50 and 100 accountants that we wouldn't need," he said, if the company simplified its payments system. Food makers, however, say that grocers are still a long way from eliminating the fees. 7 Private Label Push Store-branded products continue to take up more shelf space and gain cachet. Over the seven years ended in 2004, sales of private-label goods grew at more than twice the rate of branded goods, according to ACNielsen, and now account for 15% of supermarkets' packaged-goods revenue. Grocers like to stock private-label products because they have wider profit margins. Milk, cheese, paper products and eggs are among the largest private-label categories. Now that private labels have gained customer acceptance, grocers have started making upscale store labels. Safeway has rolled out its own line of premium beef, under the name Rancher's Reserve, and its own brand of fresh soups. 8 Targeting Labor Costs Traditional grocers have been paring labor costs to compete with the growing number of nonunion retailers that sell food. Grocers also are trying to depend more on self-checkout lanes that reduce the need for grocery clerks. As of this year, 56% of food retailers had installed self-checkout lanes, up from 15% in 2001, according to the Food Marketing Institute. 9 Dollar Aisles The popularity of dollar stores is prompting grocers to add more dollar merchandise. More than 27% of new grocery stores had aisles designated for dollar merchandise in 2004, up from just 6% in 2002, according to the Food Marketing Institute. Experts say that shoppers like the treasure-hunt feel that comes from picking up unexpected items on the cheap. Save-A-Lot, a chain of small discount grocery stores owned by Supervalu, bought a dollar-store chain in 2002 to get more dollar merchandise into its fresh-food stores, such as videos, jewelry and household goods. Adding more $1 goods also is part of Winn-Dixie's strategy to revive sales. 10 The Organic Trend The mainstreaming of organic foods has prompted traditional grocers to sell more fresh and packaged natural and organic goods. Sales of organic and natural food in the U.S. and Europe totaled $35 billion in 2004 and are expected to hit $59.2 billion by 2009, according to research firm Datamonitor. That's partly why Whole Foods, which specializes in organics, has become one of the most successful grocery chains in the industry. Organic offerings help capture younger consumers, who are more likely to choose stores based on whether they offer organic foods, according to research by the Food Marketing Institute. The organic movement is spreading beyond produce and packaged food as apparel makers roll out new organic clothing.
Higher costs are showing up at all levels -- in labor, in land and in the price of supplies and raw materials, such as concrete and drywall. When developers total these costs, they are shying away from building -- at least in some markets. In one case, Prudential Real Estate Investors postponed the 250,000-square-foot second phase of its Quiet Waters Business Park in Deerfield Beach, Fla., because of rising construction costs, said Theresa Miller, a Prudential spokeswoman. Landbank Investments, a commercial-investment and development company in Menlo Park, Calif., said it has put off projects in Silicon Valley and instead has been buying existing properties, which are selling for less than it would cost to build them. "Current rents don't justify the cost of new development," said Scott Jacobs, Landbank's executive vice president. When a developer is deciding whether to construct a building, the calculation is simple. Will the rent be high enough pay off the loans needed to finance the building and the costs of running it, while still turning a profit? One rule of thumb: For every $10 increase in construction costs -- land, labor and materials -- the developer needs to get an additional $1/sq ft in rent. In suburban St. Louis, Kelley Real Estate's 425,000-square-foot Manchester/270 Office Center is 99% occupied and commands rent of about $26 per square foot. Because of increased construction costs, two planned buildings at nearby Page/270 Office Center would need to be rented at about $30 per square foot, said Joseph Kelley Jr., the firm's president. "There's so much supply out there, we just aren't able to build the new buildings," he said. In the soft market -- the local vacancy rate is 18% -- prospective tenants can negotiate better deals in existing properties. William Hankowsky, president and CEO of industrial and office REIT Liberty Property Trust, said higher fuel prices are showing up in prices of petroleum-based materials such as plastic piping, and also in delivery charges from suppliers. Along with the rise in land costs, Mr. Hankowsky estimated Liberty's construction costs are up as much as 25% from last year. Last year, the big concern was steel, where the price rose 48% from the prior year in part by strong demand from China. This year, contractors are complaining about the high costs of concrete and gypsum products, up 10% and 13%, respectively, last year, according to a study by Ken Simonson, chief economist of the Associated General Contractors of America. High costs aren't deterring developers from building office towers in some cities with strong real-estate markets, including New York and Washington. And rising costs aren't slowing the nationwide boom in residential construction because prices for condos have soared, making it far easier to pay the cost of building. The country's residential boom has benefited developers as well, because office buildings are being converted into condos, taking supply off the market. But office rents are still lower in many markets, averaging $24.41 a square foot in Q3 for the 69 largest markets, compared with $26.85 a square foot in 2001, according to Reis. "In markets where rental rates are not rising much at all, construction costs are kind of the final straw in terms of developers' starting new projects," said Robert Bach, national director of market analysis for Grubb & Ellis. Office-vacancy rates in the largest markets still average 15% -- high compared with the 8% seen in 2000 -- but have been dropping in the past three quarters. If healthy job growth leads vacancy rates to fall into the single digits with little additional office space coming online, rents could rise. "That tends to be the sweet spot in the curve," said Robert Steers, co-chairman and co-CEO of Cohen & Steers. "Rents can move quite rapidly, whereas supply coming out of the ground cannot." Not everyone is convinced that high costs are deterring construction. Jim Costello, a senior economist with Torto Wheaton Research, argues that since there hasn't been much speculative office development, you can't say that the high cost of construction has been a factor. "If construction costs go up in a market where you don't have a lot of construction activity to begin with, it's not going to restrain too much," he said. Instead, some investors use construction costs as an easy way to rationalize overpaying for an existing building. They argue, "if I'm going to buy an asset today, maybe that justifies the high price I'm paying, because if I didn't have any new competitors coming in, I'll get rent increases," Mr. Costello said. But Bret Wilkerson, chief executive of Property & Portfolio Research, says that is just the point -- higher costs are preventing construction. The proof, he said, is in the data: The number of planned projects keeps climbing, but actual office starts remain fairly low. "If construction costs hadn't risen, we would be seeing more construction today," Mr. Wilkerson said.
Asking rents dipped slightly to $50.72 a square foot in October from $51.46 in September - but remained ahead of the average year-ago asking rent of $47.66. Sammons attributed the decline to mix, where some of the higher-priced Midtown space was taken off the market. He expects pricing - especially in midtown Manhattan - to see some "pretty hefty increases" in the next few quarters. If vacancies continue to decline, it bodes well for real estate investment trusts, such as Brookfield Properties (BPO), Boston Properties Inc. (BXP), Trizec Properties Inc. (TRZ), Vornado Realty (VNO), and SL Green Realty Corp. (SLG), which have significant holdings in Manhattan. In midtown Manhattan, the vacancy rate fell to 7.8% in October from 8.8% in September and 9.3% a year ago. The vacancy rate in Midtown South was 6.4%, flat with September, but down from 7.3% a year earlier, while the vacancy rate in downtown Manhattan declined to 9.9% from 10.2% in September and 14.5% a year ago.
“You don't need all those SKUs [stock keeping units] in the grocery store. There's too many brands, sizes and packages,” says Green, whose business, Jeff Green Partners, is based in Mill Valley, Calif. He urges traditional grocers to focus on providing strong specialty departments (meats, produce, for example) to differentiate themselves from the price-driven discounters and wholesalers. Why are so few traditional grocers embracing the idea of building a smaller store prototype? “The grocers think it's generally a good idea, but they don't want to be the first ones to downsize. It can be costly,” says Green. The pressure on supermarkets is occurring on multiple fronts. The increasing number of mixed-use projects nationally that feature specialty and gourmet food retailers such as Whole Foods contribute to the perception that the traditional grocery store format is tired. Today's mixed-use projects typically include high-end residential living that attracts sophisticated consumers. Additionally, office workers in a mixed-use project favor prepared meals to go. Still, a dominant grocer like Publix that caters to a higher-end customer and delivers on promises of strong customer service can, and does, thrive. But if the supermarket anchor is No. 3 or No. 4 in terms of market share, that anchor is a candidate to go dark. So, what's an investor to do? The best markets for shopping center investment, according to Green, follow population spikes from North Carolina to California including the Southeast, South Central and Southwest states. Picture a crescent moon from east to west. Understored urban areas also provide opportunities. But so much money is chasing real estate today that the best properties have already been taken, driving down cap rates in the process. Cap rates in Atlanta, for example, have fallen from 9.5% to 8% in recent years for grocery-anchored product. Despite risks associated with necessity retail, real estate investors remain bullish. In our NREI survey, 36% of respondents who currently own grocery- and drug-anchored centers expect the price of properties to rise in 2006. “You really need to be thinking of the down side of these grocery-anchored properties more than you did before,” warns Brett Hutchens, CEO of Casto Lifestyle Properties in Sarasota, Fla., which pursues redevelopment opportunities. “We look at the underlying value of real estate because we can create value through redevelopment. A portfolio purchaser ought to have a different mindset.”
Today, market fundamentals are different and investor expectations are at an all-time high. Across the commercial real estate world, cap rates have fallen, and prices have surged. Conventional acquisition strategies have become potentially expensive pursuits. REIT executives say that acquisition remains an important component of any growth strategy. But they hasten to add that the nature of acquisition has changed. Today, REITs acquire more and more property through funds in which they hold a minority interest or by taking on joint venture partners. By co-venturing with other investors, REITs can offer their real estate expertise to others, adding property and asset management fees to their bottom line on top of returns gained from owning a portion of the property investment. While most REITs have favored acquisition over development, today's real estate economics have brought traditional acquirers to the development side of the business. Here returns are a little higher, but life can be a little more risky. According to REIT executives from companies that have historically relied on development, this side of the business is also changing. Whatever strategy a REIT chooses to pursue — buying, building, or both—making a REIT grow in the early 21st century poses new and different challenges. Here's a look at how office, retail, multifamily and industrial REITs have renovated their growth strategies to meet today's market demands and, hopefully, exceed investor expectations. Crescent: How To Grow Without Getting Bigger "In the 1990s, bigger was considered better; today, better is better," says John Goff, vice chairman and chief executive officer of Crescent. "There is no advantage to getting bigger and owning more assets. I don't think there are any big economies of scale. What works now is thoughtfully managing the capital you have with a strategy that maximizes return on equity." Crescent owns or has interests in assets valued at approximately $4.5 billion. Crescent has 60% of its real estate portfolio [$2.7 billion] in the office category and has holdings in hotels, resorts, wellness centers and residential developments. In 2004, Crescent generated revenue of about $1.3 billion. Net income for 2004 was $172.9 million, up 565% from 2003, thanks in large part to the company's new acquisition strategy. Goff describes Crescent's model for growth as becoming a kind of investment manager for institutional investors that want to own real estate directly. Crescent will acquire and manage properties with these investors in JV structures and then collects fees for asset and property management services. Crescent will also invest its own capital in the undertakings and collect an equity share promotion at the end of the investment for meeting its partners' investment goals. Under this joint venture model, Crescent contributes 20% to 25% of the equity to a venture, brings in the rest from institutions, borrows against the equity, buys property, and manages it. "When we put a dollar to work in this kind of structure, we earn more than if we put that dollar to work wholly owning an asset," Goff says. "The premium is 300 to 600 basis points in return on equity." Boston Properties: Ever the Developer A traditional developer, Boston Properties has developed 10 million square feet of office space since going public in 1997. Currently, the company has $385 million worth of properties in its development pipeline. As for acquisitions, Boston Properties hasn't bought any property for at least a year. "We want to create value the way we always have—through development," says Douglas Linde, executive vice president and CFO of BXP. "Our development projects are for the most part fully-leased, in central business districts (CBDs) and 24-7 markets like Washington, D.C. and the Boston area." BXP owns 122 office buildings, 75% of which are located in CBDs. The company's revenue reached $1.4 billion in 2004, up 2.8% from 2003. Net income for 2004 totaled $284 million, down 22.3% from $365 million in 2003. Linde says that company developments typically yield over 10%, substantially higher than the 4% to 6% returns expected from current office acquisitions. Moreover, Linde notes that the returns calculated for a fully leased development property show cash flow returns that will not be diluted by necessary capital infusions. On the other hand, yields for acquisitions, stated as cap rates, are generally based on estimates of net operating income before deducting capital costs for tenant improvements, broker's commissions, and other costs that always arise in connection with existing properties. In other words, a cap rate can be a high estimate of the actual returns an acquisition will generate. Might Boston Properties consider an acquisition strategy similar to Crescent's, forming and managing a fund or joint venture? "We have considered joint ventures," Linde says. "And we've done some tests. By and large, though, our board's view is that shareholders would rather have 100% of one building than a 25% share of lots of buildings." New Plan: A Sale Is a Gain With a complex transaction announced in July, New Plan (NXL) hopes to generate new cash flows to fund joint venture acquisitions and development, according to Glenn Rufrano, the company's CEO. At the end of 2004, New Plan owned nearly 400 community and neighborhood shopping centers valued at $3.6 billion. For the year, the company generated rental revenues totaling $493 million and net operating income of $335 million. In July, New Plan agreed to sell 69 of its nearly 400 community and neighborhood shopping centers to Galileo America LLC, which is a joint venture between CBL and Galileo America, an Australian property trust. Galileo will pay New Plan $928 million in cash and $40 million in equity for the properties. The transaction will generate cash for New Plan, and boost income from management fees. New Plan will use some of the cash to pay down debt. According to Rufrano, the plan will generate cash flows making it possible to invest in 20% shares of joint ventures with institutional investors. Rufrano says that the property management fees and equity promotions generated by deals like this can push overall returns up to the level of a new development — without the risk associated with development. "The reason people in our business are doing this is because there are funds available out there that have a lower cost than ours," Rufrano says. "It works because institutions require returns that are lower than what we require. So they will pay fees that enable us to reach our hurdle rates." Rufrano says New Plan is developing and redeveloping properties. New developments generate returns in the range of 10% to 11%. But the returns on re-development investments can approach between 10% and 12%. Regency: A Developer First Development is the primary source of growth at Regency Centers (REG), according to Martin Stein, the company's chairman and CEO. Stein estimates that returns from new retail developments are running slightly more than 10%, compared to returns of 6% to 7% for acquired centers. Regency owns almost 300 grocery-anchored neighborhood and community shopping centers valued at approximately $3.3 billion. The company generated $443 million in revenue during 2004, up about $20 million from the year before. Net income for 2004 reached $128 million, up slightly from 2003. Stein estimates that 50% of REG's annual growth in income and shareholder value comes from development. In 2004, Regency completed 17 new developments representing a $264.2 million investment. REG also began new developments valued at $269.6 million. To fund new developments, REG sells underperforming or non-core properties. Last year, REG sold $526.7 million in developments, operating properties, and periphery property in a total of 75 transactions. "By culling our portfolio, we generate attractive returns and get brand new shopping centers," Stein says. "And we're financing the net growth of our portfolio through joint ventures." About 20% of REG's annual growth in shareholder value comes from acquisitions made through JVs with institutions. REG has JV partnerships with Macquarie CountryWide Trust and the Oregon Public Employees Retirement Fund. These JVs own 69 properties valued at $1.2 billion. Regency also manages existing properties with an eye toward internal growth in the form of rental and occupancy rate increases. Stein says that about 30% of REG's income growth comes from revenue increases achieved by existing properties. BRE Taps Multiple Sources For Multifamily Growth BRE Properties owns and operates 84 multifamily apartment communities in California, Arizona, Washington and Colorado, regions where barriers to entry, high prices and low cap rates have generally hampered returns available to property developers and acquirers. BRE's growth strategy aims to balance revenue growth with portfolio growth from developments and acquisitions, says Constance Moore, BRE's president and CEO. Moore says BRE aims for revenue growth two to three times the CPI. In 2004, BRE's rental revenue totaled $268 million, up 9.39% from $245 million in 2003. Net operating income from rentals rose 7.28% to $180 million in 2004. On the investment side, BRE targets $250 million per year in new development and $100 million per year in acquisitions to it's portfolio. Once a development has stabilized, BRE wants the property to yield at least 7.5%. Returns from acquisitions are more problematic, especially in light of the low cap rates characteristic of west coast real estate markets. Currently, the cap rate problem is worse than ever. "Today, with the [amount of] liquidity chasing properties, going-in yields are so low it is difficult to grow revenue enough to cover our cost of capital," Moore says. "And we hold firm to the premise that [an acquired] property's NOI must grow enough to cover our cost of capital in a reasonable period of time." Duke: Development Still King Development has been the primary engine of growth for Duke Realty since the company was founded in 1972, says Thomas Peck, senior vice president of investor relations. "People generally seem to think that development is extraordinarily risky — that you hit a home run or lose your shirt," Peck says. "That has never been the case for us." According to Peck, from 1993 through Q1-05, Duke developed 436 projects averaging $8 million each and produced an average unleveraged return of 11.2% once the projects stabilized. "Of all those projects, the best produced a 21% return and the worst came in at 6.1%, which is close to some cap rates people are paying for acquisitions today," Peck says. Currently, Duke owns interests in 114 million square feet of office, industrial, and retail properties valued at $5.9 billion. Revenue for 2004 stood at $836 million, up from $772 million in 2003. When the economy gets tough and cap rates rise, Duke resists the temptation to acquire. Instead, the company simply cuts back on its development work. Duke develops properties for its own portfolio, develops merchant properties that are then sold to the highest bidder, and develops under fee arrangements for owners. "When the market won't support as much development as we would normally do for ourselves, we shift resources into the third party construction area and build projects for fees," Peck says. Should a REIT buy or build growth in today's economy? Acquisition-minded REITs are increasingly open to and engaged in joint ventures and co-investment funds. Development-oriented REITs are looking at doing less development or spreading risk through joint ventures. REITs that both acquire and develop have rebalanced their initiatives, placing a little more emphasis on development than acquisition. In the end, the activities of the companies featured suggest the answer is yes, both can work—buy and build. While today's economic realities have led REITs to re-think their growth strategies, no one is changing horses completely.
Rosen projects the yield on the 10-year Treasury could hit 5.5% or 6% by the end of next year. He recommends investors start hedging their real estate positions by either selling short or selling off some holdings. His hedge fund is currently 20% short residential mortgage REITs and homebuilders and 80% long apartment and office REITs. Rosen admits he likes many REITs' fundamentals, but he expects rising interest rates to significantly dampen the sector's attractiveness as a yield investment. He also said that even though most REITs aren't directly tied to the single-family housing industry, REITs across all property types will suffer if the national housing bubble deflates because of investors' psychological association between REITs and anything that is tied to real estate. Citigroup analyst Jonathan Litt said he expects REITs to finish 2005 either flat or down, and suggested investors should consider investing in cash in the short term as an alternative. He doesn't think a 20% drop in REITs is likely unless "cap rates," the yields that investors pay for commercial properties, increase significantly and thus prices drop. On 11-01 AG Edwards Cuts Eagle Hospitality to Hold from Buy, Citigroup Cuts Mills to Sell from Hold, Citigroup Cuts Parkway to Sell From Hold, JP Morgan Cuts Mills to Neutral from Overweight, and Raymond James Cuts Arden Realty to Market Perform from Outperform. On 11-02 Wachovia Raises Parkway to Market Perfprm from Outperform. On 11-02 F Billings Cuts Lexington to Market Perform from Outperform. On 11-02 RBC Cuts Mills to Sector Perform from Outperform. On 11-03 F Billings Cuts Govt Properties Trust to Market Perform from Outperform. On 11-03 Raymond James Cuts Maguire Properties to Outperform from Strong Buy. On 11-09 Keybanc Cuts Equity One to Buy from Aggressive Buy. On 11-10 JP Morgan Cuts Mills to Underweight from Neutral, KeyBanc Cuts Mills to Hold from Aggressive Buy, Deutsche Bank Cuts Mills to Hold from Buy and M Stanley Cuts Mills to Equal-Weight from Over. On 11-11 Wachovia Cuts Eagle Hospitality to Underperform from Market Perform. On 11-11 JP Morgan Cuts Education Realty to Neutral from Overweight. On 11-15 Baird Cuts Education Realty to Neutral trom Outperform and Keybanc Cuts Education Realty to Hold from Buy. On 11-17 Merrill Lynch Starts Equity Inns At Buy. UBS analyst Chris Pike on 11-11 downgraded Apartment Investment & Management (AIV), Archstone-Smith (ASN), Camden (CPT) and Equity Residential (EQR) to reduce from neutral. Pike noted that the spread between apartment REITs and the 10-year Treasury is negative 5 basis points, which is considerably thinner than the historical average of 180 basis points. "The last time the spread was this thin (and was never negative) was in early August 2005, which resulted in an 8% selloff soon thereafter," he said. Pike said speculation about merger-and-acquisition activity, modest inflation prospects, and a possible pullback in Fed tightening in 2006 are likely driving up the apartment REITs. However, "we continue to believe REITs remain vulnerable to higher rates," he said. Pike maintained a neutral rating on two apartment REITs: Home Properties (HME) and United Dominion (UDR). He said these companies have "suffered disproportionately and have not exhibited the same rebound as the apartment sector overall." He estimates the two trail the sector recovery by about 500 basis points. (Janet Morrissey; Dow Jones Newswires) On 10-13 AG Edwards upped Liberty Property to Buy from Hold. On 10-12 Freidman Billings started Maguire Properties at Market Perform. On 10-11 Goldman raised Kite Realty to Outperform from In-Line. On 10-11 Banc Of America upped Camden Property to Buy from Neutral. On 10-10 Citigroup raised Home Properties to Hold from Sell. On 10-07 Bear Stearns upped Archstone-Smith to Outperform from Peer Perform, Cut Boston Properties to Peer Perform from Outperform, upped Camden Prpperty to Outperform from Peer Perform, and Cut Equity Residential to Peer Perform from Outperform. On 10-07 Wachovia started Medical Properties at Outperform. On 10-04 Bear Stearns Starts Highland Hospitality At Outperform. On 10-03 Citigroup started Highland Hospitality at hold. On 10-04 Wachovia cut Brandywine Realty To Market Perforn from Outperform. On 10-04 Harris Nesbitt cut Brandywine Realty to Neutral. On 10-04 Raymond James cut Prentiss Properties to Underperform from Market Perform. On 10-04 Wachovia raised Post Properties to Market Perform from Underperform. On 10-04 AG Edwards cut Prentiss Properties to Sell from Hold. On 10-04 Banc Of America cut Prentiss Properties to Neutral from Buy. Fitch affirms "BBB-" rating on CNL Realty offering Orlando Business Journal 11-17 Fitch Ratings affirmed a "BBB-" rating on Commercial Net Lease Realty's $150 million offering of 6.15 percent, 10-year senior unsecured notes. In addition, the New York City ratings firm revised CNL Realty's rating outlook to positive from stable. Fitch cites the Orlando-based real estate investment trust's "solid and growing portfolio of single-tenant stand-alone retail centers," "solid leverage and risk adjusted capitalization," "adequate funding profile" and "consistent use of unsecured financing." As of Sept. 30, CNL Realty's properties reached the peak occupancy level of 99%. However, Fitch expressed ratings concerns about the company's small size; a modest shift away from its main focus on free-standing retail space to include a Washington, D.C., office property and mortgage residuals; and an anticipated decline in consumer spending. In the short term, Fitch expects CNL Realty to continue its existing growth trend that has further diversified its portfolio. But in the long run, Fitch anticipates the company will not maintain the peak occupancy level and will sell certain properties to maintain growth. CNL Realty specializes in leasing single-tenant stand-alone retail space on a triple-net basis. It has 464 properties in 41 states leased to 172 companies. On 9-07 S&P Puts Capital Automotive REIT Rtgs On Watch. On 9-08 Moody's Affirms Rtgs Of Developers Diversified (Sr DEBT AT Baa3); Rtg Outlook Now Positive. On 9-28 Moody's upgraded Simon Property Group's Sr Debt To Baa1; Stable Outlook. Quick Facts The recent pullback in the world of real estate investment trusts represents a buying opportunity for investors, KeyBanc analyst Richard Moore said Thursday. Although the Morgan Stanley REIT index remains positive for the year and ahead of the S&P 500, Nasdaq and Russell 5000, the 10% drop off since Sept. 6 has brought valuations down. The pullback was "much sharper than that of the other major indices," said Moore, in a note. Despite the correction, he said, REIT fundamentals remain healthy. "Given the sharpness of the pullback, several of our buy-rated names have been hit exceptionally hard and represent what we believe is compelling value at these levels," he said. His top picks of stocks that he believes offer the biggest near-term outperformance include CBL, Glimcher, Mills, Reckson Associates, United Dominion Realty, and Weingarten Realty. (Janet Morrissey, Dow Jones Newswires 10-13) More REIT Links News Links
Update: Fourth Experiment in Stock Picking 11-25-05 A less than sector balanced portfolio is compared with the average of two REIT index ETF's: ICF [Cohen & Steers Realty Majors - the top 30 REITs by market cap] and RWR [the REIT Wilshire Index]. This is part of a continuing experiment to see if an individual investor can find some benefit in buying individual stocks. Four of the stocks below [MLS at 50.72%, DDR at 38.25%, VNO at 44.24% and OFC at 44.62%] notably out-performed the REIT sector average of 32% for the full year of 2004. This portfolio beat the sector average in 2004 by 300 basis points - so some regression to the mean is to be expected. Note that this portfolio, while being weighted toward higher growth and lowering yielding REITs, still pays a higher dividends per quarter than RWR and ICF. Earnings Guidance & Dividend Changes: OFC gave 05 FFO guidance of $1.78 - $1.85 per diluted share in their Q4 conference call on 2-10-05. The current consensus estimate is $1.84. OFC on 5-19 declared a quarterly dividend of $0.255 per Common Share of beneficial interest [an increase from 24 cents/share]. The dividend will be paid on 7-15 to shareholders of record on 6-30. UDR on 2-16 announced a 2.6% increase in its dividend for 05 to $1.20 per share. ARE on 2-14 updated its 2005 earnings guidance to an FFO of $4.78 [vs a current consensus of $4.80]. On 5-11, ARE announced expected 05 FFO/share to be $4.79. On 6-20 ARE raised dividend 3% To 68 cents per share. ARE announced 8-02 that expected 05 FFO/share to be $4.81. AMB on 3-01 declared a regular cash dividend for Q1 of $0.44 per common share. The dividend reflects an annual indicated rate of $1.76 per common share, an increase of 3.5% over the 2004 annual dividend. On 4-12 CARS announced that it raised the company's quarterly dividend to 43.8 cents per share, payable on May 20 to shareholders of record as of May 10. On 7-12, CARS increased its dividend 2% to 44.6 cents per share from a prior level of 43.8 cents. The company also reaffirmed its guidance for an annual common share dividend of $1.80 per share in 2005. HR on 4-26 announced its 47th consecutive dividend increase to $0.655 per share. At this rate, quarterly dividends approximate an annualized dividend payment of $2.62 per share. Update: Fifth Experiment in Stock Picking 11-25-05 Given the amount my portfolio has changed, I started stats on a new 'experiment'. Or maybe I got tired of seeing my results trail the ETFs - and wanted some stats that stroked my ego. That has not workd so far - MLS is down big, again. I bought triple-net O and hospitality ENN since starting this 'experiment'.
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