Get To Know Your Market
Those with boots on the ground, not surprisingly, claim there is lots of opportunity to buy. The key is knowing the markets, says Jason Yablon, a global portfolio manager at New York asset manager Cohen & Steers. For example, peripheral Europe, he says, is performing worse than the U.K., Germany and France. Real estate, the quintessential supply-demand game, has a limited amount of the supply all over the world after the construction largely stopped during the financial crisis (a good thing for investors, since there's no supply competition) but many areas can't hold up the other end of the equation-i.e., the demand part has been weak. In this firmament, high-quality real estate and higher priced assets have trumped lower-end buildings, Yablon says.
"In Europe, the more dominant malls are outperforming the less dominant malls and taking their market share," Yablon says. "Despite some of the macroeconomic troubles that Europe is going through right now, there are still good opportunities to own good, high-quality assets at good prices."
He mentions Simon's new 28% stake in Klepierre, a French retail property company with 271 properties in 13 countries, which it bought in March for $2 billion from the French bank BNP Paribas. Indianapolis-based Simon's deal gave it lots of square footage, but also added to its earnings, got it a 6.5% cap rate and was seen by observers as a play for future deals abroad. And the financing, says Yablon, was efficiently done with equity, which is hard to do in Europe. Simon issued 8.5 million common shares at $137 a share to finance the equity portion of the deal and sold unsecured debt with various maturities of five to 30 years. That was about $1.75 billion in debt issued at 3.4%.
"We like the Simon deal," says Yablon. "We think they're buying a company with operational upside where they can add a lot of value given their expertise. Additionally, they financed it extremely well, so the financing on their debt was under 3.5%. Their earnings will go up because their cost of capital is lower than that of the company that they're acquiring." Simon was also smart because it dipped its toe in the water without betting the whole house, he says, and furthermore, it raised money for the deal in the more efficient U.S. capital market, not in the dyspeptic European ones.
He also likes the deal done by Deutsche Wohnen, a German-listed residential property company, which took German multi-family housing company Baubecon, with 23,500 units, off the hands of Barclays with a mix of debt and equity in a 1.235 billion euro acquisition. Meanwhile, in June, Brookfield Office Properties, though not technically a REIT, announced it was taking a portfolio of office buildings in the London financial district off the hands of Hammerson plc, known more for its retail properties, for $829 million.
Says Philip Martin, a REIT strategist at Morningstar, the good real estate deals will largely come when companies need to scrape property off their balance sheets to rationalize their own books, build their capital or improve their capital ratios. It could be banks like Barclays and BNP, for example, European concerns that need to raise their capital levels to meet stricter rules. Real estate holdings on a bank's balance sheet may be more expensive than they would be on the books of a REIT, which could step in and find (or create) the value.
"Maybe they are European companies that have a lot of exposure to real estate but they are retailers," says Martin. "And these companies have to look at this and say, 'Do we want to own this or monetize some of the real estate assets that they have on the balance sheets?'"
He takes as an example McDonald's, which rumor mongers have hoped for 15 years or so would spin off its vast real estate holdings into a real estate investment trust, a hope the burger empire has often poured cold soda on-even though the wags insist it would boost shareholder value. "Their business is fast food," Martin says. "That's where they excel. But they happen to own that asset on their balance sheet. It's worth a lot of money; maybe they can sell it and take the proceeds and redeploy the proceeds in an effective manner so that McDonald's is more efficient."
For investors to take advantage of these deals, Yablon says, the best strategy is active management. "Internationally there is a wide divergence in the execution abilities and the ability to create value of the different management teams," he says, "so you want to be with the right management team owning the right asset. You don't want to buy a little bit of everything."
Andrew Wood, an executive director at MGPA, an independent private equity real estate advisory company that manages $11 billion in assets in Europe and Asia, says that despite Europe's problems, his firm has found themes there auguring the decent creation of value.