REIT CEOs Highlight Silver Linings at NYU Schack Conference
Here's how three public real estate companies, all leaders in their sectors, are surviving and thriving in these turbulent times.
During a panel titled “The Long-Term Impact of COVID” at the 25th Annual REIT Symposium hosted by the NYU School of Professional Studies Schack Institute of Real Estate, REIT executives discussed their operational gains and losses as a result of the global pandemic and the calls for social justice that have shaped the past 12 months.
Boston Properties CEO Owen Thomas said his company’s office buildings have stayed occupied from a leasing standpoint while only 8 to 10 percent of workers have returned to the office.
Meanwhile, the company has been collecting 99 percent of rents, and they completed 3 million square feet of new leasing this year—60 percent of normal but the market is 40 percent of normal.
“And these were not just short-term, kick-the-can renewals,” Thomas said. “The weighted average lease term of all those deals is over 8 years.”
READ ALSO: Global CRE Industry Optimistic About the Future: SIOR
Thomas added that his company has felt the impact of the pandemic mostly in its variable income streams—parking, retail and one hotel, resulting in the company’s run-rate FFO per share to be down 15 percent. But, while their stock price is also down due to work-from-home concerns, they have maintained their dividend.
Boston Properties also completed a $1.25 billion unsecured bond deal early in the pandemic and an $800 billion green bond deal about a month ago.
Fellow panelist Edward K. Aldag, chairman of Medical Properties Trust, said his firm also collected “all of their rents” and “truly had a fantastic year,” managing to acquire $3.5 billion dollars of properties—mostly before the pandemic and late in 2020. This year, the company made a large behavioral health acquisition in the U.K., and that will continue to be a bigger focus for the company.
Public Storage Chair Ron Havner said his company saw a surge in demand first quarter 2020 as students moved out of colleges, followed by a dramatic drop in demand and moveouts in the second quarter. During the third quarter, they saw a pickup in demand that continued during the fourth quarter and first quarter of 2021.
“While move-in volume is down 5 to 8 percent, move-out volume is down 10 percent and customers are staying much longer,” he said.
Clockwise: Boston Properties CEO Owen Thomas; Medical Properties Trust Chairman Edward K. Aldag; Public Storage Chairman Ronald Havner, Goldman Sachs Real Estate Investment Banking Global Co-Head Mike Graziano, and REIT Board Director Mary Hogan Preusse
Changes That’ll Stick
COVID-19 and other disruptions have certainly changed how these companies operate—in some ways permanently.
“Before the pandemic, we’d been experimenting with some greater technology in the operation of our business and piloting a thing called e-Rental, where you can do all of your leasing online,” Havner said. “When the pandemic hit, that got rolled out right away.”
Today, 46 percent of Public Storage’s customers are searching locations, signing leases, and vacating spaces online. Customers are also paying online, which has put a dent in the company’s revenues from late fees. Meanwhile, Public Storage’s two call centers of 200 to 300 people have gone remote. “That’s not coming back.” Havner said.
READ ALSO: What the Future of WFH Means for Office Space
Ed Aldag said the biggest change is the way the industry now gathers and communicates. While the company was happy to have virtual offices when they needed them, he finds traveling critical to forming new relationships and is anxious to see that return. And the company will definitely be expanding its physical office presence in key markets.
“I believe you do business with people and not with corporations, and it is hard to do business this way,” said Aldag. “It is OK if you have a long-term relationship with someone, but trying to form a new relationship over Teams or Zoom or teleconference just isn’t the same thing as being across the table from someone.”
Thomas agreed that not being able to be in person can be frustrating but, he said, COVID-19 has highlighted the importance of communication, and virtual meetings offer an immediacy that was previously not possible.
“I think there have been some positives that come out of this whole virtual Zoom environment that have helped us come together and coordinate more across all of our (six) regions,” he said.
Other changes at Boston Properties that are likely to outlast the pandemic are a greater emphasis on health security; an increased focus on diversity, social justice and all things ESG; and more life sciences demand. Last month, the company announced three new life science projects totaling $500 million to 600 million.
“We’ve always been in that business,” he said. “We are certainly emphasizing it even more.”
View From the Boardroom
The panel also featured Mary Hogan Preusse, who sits on the board of four REITs: Digital Realty Trust, Host Hotels & Resorts, Kimco and VEREIT.
“A good lesson of 2020 is that it is actually possible to have all your companies be in crisis at the same time and get them through all of this,” she said.
Last year, Preusse said, also shone a spotlight on the composition of boards. “As a board member and a socially responsible investor, I would say the silver lining of the very difficult time we’ve been through from a social perspective, is this radical acceptance of the importance of corporate diversity, board diversity and the importance of all the pillars of ESG,” she said.
READ ALSO: REITs Ramp Up ESG Campaigns
Despite an initial sell-off, Preusse said, many investors have stayed in REITs and seemed to share the ability of REIT leaders to “look over the mountain to opportunity.” Another silver lining is that stock market values and private market values are now more closely aligned.
“Volatility has not been the REIT market’s friend over the past several years,” Preusse said. “I think people questioned whether REITs should be used a proxy for real estate, and there is a real disconnect between real estate values and where REITs are trading.
“I would say that has really reversed itself nicely in 2020. The volatility created so many asset value opportunities in the stocks that that disconnect seems to have pretty much righted itself even though it took three years,” she noted.
The panel was moderated by Mike Graziano, global co-head of Real Estate Investment Banking at Goldman Sachs & Co.
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