One of the ways we keep our ear to the ground to gather macro Commercial Real Estate trends and themes is to read the commentary found in some of the larger REIT’s annual reports. Often the Chairman will discuss the company’s operations and then provide a bit of commentary on what they see on the horizon. Below are some snippets I found informative:
Vornado’s CEO Steve Roth on the economy and the potential effect of long-term, low interest rates:
It feels to me that we are on the foothills of a major economic expansion in America. What’s going on in the real economy – housing, autos, innovation, etc. is the real McCoy. It also feels to me like interest rates will stay lower for longer than the pundits expect and that we are near the tipping point where market participants will start to believe and act as if it’s their God-given right to zero-bound interest rates. I don’t expect cap rates to rise anytime soon.
And from the following analyst conference call:
If I was pressed, I would say that the strip business is a mispriced business in this environment, and compared to other assets that are available in the marketplace, a 6.5% cap rate, good strip shopping center, I believe is a better investment that it is a sale. And especially when you think that you can put a sub-4% leverage on that asset and get almost a 10% return, there’s very little CapEx that has to go into strip shopping centers, so we like that business.
From Kimco’s Milton Cooper during their conference call:
And now I’d like to comment on cap rates. There’s a wonderful blog entitled, “Look Ma, No Inflation” by that REIT seer, Ralph Block. Ralph postulates that gold, silver, oil and other commodities are selling far below the February 2012 peak. Future inflation is likely to be in the 1% to 2% range rather than 2% to 3%. And if inflation declines by 1%, cap rates should similarly decline by 1%. And the softening in prices should help the consumer and certainly help retail real estate. Now what defines quality real estate? My definition of quality real estate is real estate that has a safe, sustainable, growing cash flow over an extended period of time in good markets.
CBL’s Lebovits(s), both father and son, talk about the effect of almost no retail construction over the past 5 years:
Currently, there is little or no construction of new shopping centers in our markets. Retailers that have had several strong years of earnings and sales are looking to expand, yet have fewer options. This has enabled us to increase our occupancy and attract new retail formats.
In conclusion, I found a couple comments that sounded familiar to our organization. The first was a recount of the strategy CBL implemented during the Great Recession:
We maintained stable performance during the past several years because of the steps we took to preserve income and occupancy and reduce expenses. These steps included signing shorter term leases and focusing on maintaining occupancy, versus lease spreads. Now, with many of those short-term leases expiring, we are seeing the benefits of that strategy with positive lease spreads for both renewals and new leases and more new retailers expanding at our malls.
During those dark days, we did the same thing at Shannon Waltchack. Whatever it took to hang on to a tenant, we did. Occupancy, Occupancy, Occupancy was the mantra. Lastly, here is a picture of the door on our small conference room:
And from Simon Property Group’s annual report:
Our primary objective, as it has been every year since our 1993 IPO, is to manage each asset as if it is our only asset. We are stewards of the business, but we are more than professional managers. We act as owners!
It’s affirming to see that Shannon Waltchack operates by the same philosophy as the largest, most successful REIT in the world.