19 November 2018

REITs Portfolios Shift Back to Basics

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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 Fifth Avenue.

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.

Click here to access the full article on The Wall Street Journal. 

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