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Citi Previews REITWeek, Along With Some Other REIT Trends

Citi Previews REITWeek, Along With Some Other REIT Trends

OCiti Research analyst Michael Bilerman and his team on Monday published a report focused on the REIT industry "big picture" one day before the kick-off of NAREIT Investor Forum to be held in NYC June 9 - June 11, 2015.

Citi noted that after starting off the year with a 10 percent pop in January, REIT shares are now down an average of 4 percent, mainly on rising interest rate concerns.

Can REITs Continue To Outperform The Broader Market?
However, the demand for institutional quality real estate by private sector buyers remains high, which creates an environment where public REITs can "recycle capital" at low cap rates, to reinvest in redevelopment, new development or execute stock repurchases.

Citi - REIT Metrics At A Glance
Citi expects many management teams to be quizzed by investors as to why they are not more actively recycling capital to redeploy at higher cap rates, or considering a sale of the entire company to maximize shareholder value.
Commercial real estate remains attractive for private investors seeking to improve portfolio yields, with an investment that has traditionally been a hedge against inflation.
Historically, cap rates today are low as institutional and private buyers bid up the price of assets.
Strong real estate fundamentals are a tailwind for REIT multiples in most commercial real estate sectors.
REIT AFFO represents cash available for distribution to shareholders. The broader market valuations vs. REIT valuations have varied greatly over the past 20 years.
Self-storage REITs have led the way on same store NOI growth, while the office sector has noticeably struggled of late.
Overall U.S. office occupancy continues to lag behind the broader commercial real estate recovery.

REIT Sector Preview

Healthcare: The sector is down 9 percent year-to-date vs. 4 percent for the broader REIT sector. Citi noted this sector is more sensitive to interest rates, and is being "worn down" by fears of spreads narrowing as rates tick up.

Office: "Positive trends: good fundamentals, continued institutional bid for core assets at low cap rates (CBDs), & healthy demand for developments." It remains to be seen how office REITs focused on suburban and secondary markets will be able to overcome secular shifts favoring urban live-work-play and gateway city job creation.

Citi is looking to hear updates on large scale office development projects, including:
Boston Properties, Inc. (NYSE: BXP) Salesforce Tower, still at site development stage.

  • SL Green Realty Corp (NYSE: SLG) 1 Vanderbilt, following zoning approvals.
  • Kilroy Realty Corp (NYSE: KRC) Kilroy's One Paseo project received approval, but the overall project will now be smaller than Citi expected.
  • Vornado Realty Trust (NYSE: VNO) plans for Penn Plaza after acquiring a few new parcels and 220 Central Park South which has already seen some presales, among many others.

Citi will be looking for updates on preleasing, yield and project milestones.

Residential: Citi is looking to hear how landlords have fared during "peak leasing season." The sector trades at an overall 5 percent discount to NAVs, and Citi expects management to be "bullish on fundamentals" and discuss private sector asset valuations.

Retail: After a positive ICSC RECon meeting in Las Vegas two weeks ago, Citi expects retail landlords to remain positive during NAREIT presentations. Retailers are looking to expand into high quality, well located space; while reduced vacancy is also fueling redevelopment projects.

Self-Storage: Given strong fundamentals, including "very high occupancy levels at over 90%, continued growth in same-store revenues will be rate driven. Investors will look for updates on success in raising street (asking) rents, an indicator of demand given peak occupancy levels, as well as success in raising rates on existing customers."

Lodging: Citi expects to hear updates on New York City and Washington D.C. markets, and expects West Coast and CBD markets to be the focus for expansions and acquisitions.

Data Centers: Citi "focus at NAREIT next week will be to better understand the long term supply/demand trends in different markets, measure progress on each REIT's desire/move to go down the retail stack, thoughts on M&A, quantify the G&A impact of new hires and strategy shifts."

Latest Ratings for BXP

Apr 2019UpgradesSector WeightOverweight
Apr 2019MaintainsHoldHold
Mar 2019UpgradesIn-LineOutperform

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Posted-In: Citi ResearchAnalyst Color REIT Previews Events Analyst Ratings Trading Ideas Real Estate Best of Benzinga


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