With commercial-property values soaring and investors
gravitating toward what they see as companies with stable, predictable returns,
REITs increasingly are pruning their portfolios of assets that fall outside
their core area of focus. Diversity is a liability because different types of
real estate, from offices to warehouses to apartments, are valued based on
different models. The market often penalizes companies for their lack of focus
with a discounted share price.
The trend in REITs is part of a broader shift in investor
sentiment over the past decade or so away from big and complicated companies
and toward smaller and more-focused ones.
Duke Realty Corp. in the past few years has transformed from
a diverse landlord into one that relies heavily on industrial property for
income. It chose warehouses over offices because managing office assets is more
capital-intensive than managing industrial properties, and industrial property
has produced better cash flows in recent years.
The moves seem to be paying off. After trailing its peers in
the industrial real-estate sector and the broader REIT market from 2003 through
2007, Duke's total returns including dividends were 11.8% in 2013, compared
with 4.9% for industrial REITs and 1.2% for REITs overall.
In all, Duke has sold about $3.3 billion in property, mostly
suburban office buildings, including about a third of that in a $1 billion deal
struck in 2011 with private-equity giant Blackstone Group LP.
Other REITs are shedding assets that don't fit their
specialties, too. In April, Vornado Realty Trust said it would spin off 81
U.S. shopping centers and four malls into a stand-alone company, leaving the
remaining company to focus on its high-quality office towers in New York and
Washington and luxury retail properties located on streets like Manhattan's
The move was seen as a response to complaints from investors
who thought Vornado, whose shares trailed its peers over the past half-decade,
was too unfocused. Steven Roth, Vornado's chairman and CEO, told
shareholders the move was a way to "de-conglomerate two very different
businesses." Vornado's share price jumped 11% in the two months after the
company detailed plans of the spinoff, but has since settled at around 4% higher
than the price on the day of the announcement. Vornado's total returns outpaced
those of its peers in April and May, but have trailed the office sector
slightly since then.
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