watched as investors fled REIT stocks when,
in May 2013, the Federal Reserve Bank
announced that its quantitative easing policy would be coming to an end.
The established school of thought is that
REITs suffer when interest rates rise and
other investment options become more
attractive—hence the dumping of these
But in reality—and certainly in the current cycle—it isn’t that simple, the REITs
argued, and as events played out, they
turned out to be correct. The market had
unfairly penalized REITs.
As the dust settled, they reevaluated the
landscape and came to new conclusions,
namely that the S&P 500 was probably overvalued after its rocket ascent in 2013, and
fundamentals were strong for real estate.
“It’s not that the market ignores interest
rate rises but improvements in the economy
are more important,” Case said at the time.
Back to Square One?
And so here we are, one year after the Fed
threw the REIT industry into turmoil. In
many ways, the industry looks the same;
capital raising is still very robust and with
full coffers, REITs are both active buyers
and sellers of assets.
But it is not exactly the same. As REITs
continue their reboot this year, a number of
emerging trends are poised to shake things
up a bit.
Non-traded REITs are a growing force,
with the New York City-based American
Realty Capital serving as exhibit A. Eventually
these non-traded REITs will be seeking a
liquidity event for its endgame, whether it is
a public listing—as ARC has done on many
occasions—or a sale of its assets.
And while debt and equity markets are
wide open to REITs, many have concluded
they would be even more generous with a
carefully culled portfolio of assets. Hence,
the flurry of single-asset REIT spin-offs.
At the same time, the universe of REIT
assets is expanding to include everything
from cell towers to electronic billboards.
The Internal Revenue Service indicated at
one point it would carefully scrutinize these
transactions. Then, earlier this year it gave a
favorable ruling to CBS’ proposal to convert its outdoor advertising subsidiary, CBS
Outdoor Americas, into a REIT. Other
proposals to turn unorthodox asset classes
into REITs are taking heart from the ruling.
Despite these changes—or, rather, in
part because of them—the bottom line is
that REITs are back in business, following
the same upward trajectory that they always
do during their extended cycle.
Liquidity End Games
One doesn’t have to be an investor, or even
a fan, of ARC to realize that non-traded
REITs have made serious inroads in the
larger REIT universe. These entities have
become serious acquirers and capital rais-ers, as industry statistics show.
Assets under management for the non-traded REIT industry were estimated to be
$77 billion as of the end of 2013, down from
$84.9 billion at the close of 2012, according
to the Real Estate and Investment Securities
Association and Blue Vault Partners.
Estimates indicate that the non-traded
REIT industry raised more than $19 billion
in new capital during 2013, the highest
amount raised in one calendar year and
nearly double the amount raised in 2012.
Investors are flocking to non-traded
REITs because of their returns, which Blue
Vault and REISA quantified in a recent
joint study. It found that two-thirds of the
full-cycle REITs outperformed the S&P 500
Index and 20 of 27 outperformed
Intermediate-Term US Treasury Bonds
when compared over matched holding
periods, noted Vee Kimbrell, managing
partner of Blue Vault, when announcing
the study’s results.
“Our study showed that full-cycle non-traded REITs averaged annual returns of
8.27%, outperforming both the S&P 500
Stock Index total return of 6.08%, and the
Intermediate-Term Treasury Fund benchmark’s average returns of 6.22% over
matched holding periods,” he said.
Ultimately, full-cycle events returned an
estimated $16 billion to non-traded REIT
equity investors during 2013.
Increasingly these “events” include
going public and starting a new cycle in the
capital markets. ARC, to again cite the ultimate poster child for non-traded REITs, has
taken a number of its funds public, including, recently American Realty Capital
Healthcare Trust. It listed on the NASDAQ
Global Select Market in April boasting a
141-property portfolio focused on medical
office buildings and seniors housing communities, along with hospitals, post-acute
care facilities and other assets.
With a new channel to the capital markets thanks to its NASDAQ listing, the REIT
is planning on more acquisitions.
Annual Revenue Growth Return on Equity Price to FFO Multiple
Note: Average represents median industry numbers during all periods
Non-traditional REITs Traditional REITs
0.0% 5.0% 10.0% 15.0%
0.0% 5.0% 10.0% 15.0%
0.0% 5.0% 10.0% 15.0%
Financial Comparison of Non-traditional and Traditional REITs