The Real Deal New York

A REIT rundown for 2014

With the broader REIT market up, New York-focused real estate investment trusts are mostly keeping pace

April 01, 2014
By Janna Herron

From left: Jay Shah of Hersha Hospitality Trust, Jon Bortz of Pebblebrook Hotel Trust and the Benjamin

From left: Jay Shah of Hersha Hospitality Trust, Jon Bortz of Pebblebrook Hotel Trust and the Benjamin

Vornado Realty Trust shareholders are waiting to see if the real estate investment trust goes ahead with the idea it floated last month to spin off its suburban shopping centers into a separate entity.

Such a deal could be a boon for the REIT’s investors, who would likely get a share of the new company.

In addition to that news, Vornado shareholders, as well as investors in other New York–focused REITs, are seeing positive growth this year.

So far in 2014, the Vanguard REIT Index ETF, a benchmark for real estate investment trusts nationwide, gained more than 9 percent by mid-March.

That follows a 1.9 percent decline in 2013 that was largely attributed to concerns about interest rates rising — a major issue for REITs, which depend on short-term financing because they are required to return most of their income as dividends. Higher interest rates increase costs, reduce investment and pare back dividends.

Depending on their subsector, some — but not all — New York City–focused REITs have shared in the gains seen in the broader REIT market this year.

Apartment REITs with major New York City exposure followed a similar, if more pronounced, trajectory as the index, while hotel REITs with New York properties trekked an opposite course, with big run-ups last year, but slower 2014 gains.

The performance of New York–focused office REITs overall was mixed in the first few months of 2014.

Apartment REITs rebound

Median apartment rents may be slipping in Manhattan, but shares of AvalonBay Communities and Equity Residential are on the rise, and both outperformed the benchmark index so far this year.

Shares of Virginia-based AvalonBay, which owns more than 17,300 units in the New York area, or about 22 percent of its total holdings, rose almost 10 percent by mid-March.

Meanwhile, Sam Zell’s Chicago-based Equity Residential — which as of December had 38 New York City properties with more than 10,300 units, or about 10 percent of its total holdings — saw shares gain about 12 percent since the start of 2014.

That’s a far cry from the pair’s disappointing 2013 performance— AvalonBay lost 13 percent and Equity Residential fell 8.5 percent.

The outlook for apartment fundamentals in New York is good, even if there has been a slowdown in rent growth recently.

“New York rents have been a little soft as of late, but apartment [sales] prices remain high,” said Alexander Goldfarb, managing director and the senior REIT analyst at Sandler O’Neill + Partners. “So if you’re a single person or just coming to the city early in your career, renting is the dominant way you get your housing here.”

Hotel REITs start slow

After going gangbusters in 2013, outperforming all REIT subsectors with leaps up to 32 percent, hotel REITs with New York exposures lagged in the first part of this year.

Shares of Host Hotels, Hersha Hospitality, LaSalle Hotels and Pebblebrook Hotel Trust all delivered double-digit gains last year, but in 2014, only Pebblebrook is continuing to see the kinds of gains recorded by other REIT shares. The others are appreciating at a slower pace.

This comes despite the fact that New York logged a record number of visitors last year — 54.3 million — who booked 30 million hotel room nights, an increase of 1 million from the previous year, city figures show. Average daily room rates also gained 1 percent, to $280.72 in 2013, according to hotel consultancy Lodging Advisors LLC.

City officials are predicting 55 million visitors this year, positioning these REITs for further growth.

Host should benefit from its second Westin location in Union Square, which opened in 2012, while LaSalle Hotels’ $65 million renovation of the Park Central Hotel into two separate hotels should also pay off. That REIT renovated the 761-room Sixth Avenue hotel, creating the newly opened boutique-style WestHouse on the top floors.

Pebblebrook also spent last year upgrading two Midtown holdings: The Benjamin and the Affinia 50. Hersha, meanwhile, capitalized on the strong hospitality market in January by selling its 70-room Hotel 373 in Midtown for $37 million.

“That strong internal growth underpins real estate value creation,” Sullivan said.

Office REITs mixed

The performance of NYC-focused office REITs doesn’t fit as tightly into a box.

SL Green and Vornado, which diversified their property holdings or spread to non-traditional office markets, delivered 21 percent and 11 percent returns, respectively, in 2013. That pace has slowed so far in 2014 but is still in positive territory.

Last year, Vornado focused on buying up prime retail and mixed-use locations as demand in urban retail properties soared.

In September, Vornado, through a joint venture, bought 650 Madison Avenue, a 594,000-square-foot office tower with retail space, for $1.295 billion. The retail portion houses Crate & Barrel’s flagship store.

Manhattan-based SL Green likewise capitalized on the retail market in 2013, by selling the stakes in retail properties at 747 Madison and 21-29 West 34th Street that it owned with partner Jeff Sutton for a combined $355 million. It acquired the 49-year leasehold interest in 650 Fifth Avenue, again with Sutton, and bought out Juicy Couture’s existing lease there to reposition the building’s prime retail corner location.

The company also took advantage of growing office demand from technology and creative firms in Midtown South, and doubled its lease with the anchor tenant at 635-641 Sixth Avenue, which it acquired in 2012 for $173 million.

And to top off the year, SL Green persuaded Citigroup to relocate its headquarters to 388 and 390 Greenwich Street, from Boston Properties’ 399 Park Avenue. The bank will pay rents of about $80 per square foot on its 2.6 million-square-foot lease at the Tribeca complex.

“SL Green is one of the better cash-flow engines,” said David Toti, senior managing director at Cantor Fitzgerald. “The company doesn’t just own and operate and collect rent. The management is good at getting cash in other ways, which may be slightly higher risk, but investors reward that activity.”

Meanwhile, Mort Zukerman’s Boston Properties, which did not make the move to Midtown South to capitalize on the growing tech demand, saw shares lose more than 5 percent last year.

But the stock has come back so far this year, gaining more than 11 percent. The REIT reported in January that it leased up 760,000 square feet for more than $100 per square foot in 2013, largely to its traditional Midtown tenant base. That’s a 38 percent increase over 2012.

“Investors have gotten more comfortable with what Midtown leasing is and that softness will eventually go away,” said Sandler O’Neill’s Goldfarb. “They realize that not everyone has left Midtown for Midtown South.”

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