REITs, or real estate investment trusts, are companies in the business of buying, operating, and selling real estate at optimal values over time.
REITs were designed by the U.S. Congress in the early 1960s as a route for smaller investors to have the ability to own large real estate projects. With the current shrinking economy, how are these companies fairing? Parkway Properties and EastGroup are two REITs based in Mississippi. Both companies show being affected by the unstable stock market, but recently, both report they are doing fine.
In April, EastGroup told the Mississippi Business Journal that it was feeling the effects of the economy, but, overall, was doing well. EastGroup CEO David Hoster said, “In the economy, now, we are seeing an increase in companies actively looking for new space.” He added that EastGroup has been the best performing industrial REIT in the past 15 years. “Our debt is low and we had a conservative dividend policy over the years,” Holster said.
Parkway Properties said it is weathering the economic downturn well. Parkway specializes in the operation, leasing, acquisition and ownership of office properties. It owns and manages a portfolio of nearly $2 billion, with nearly 70 percent of its holdings located in Houston, Chicago, Atlanta, Memphis and Jackson. Mitch Collins, executive officer with Parkway, said that the company, like most REITs, is also dependent on a stable debt market. “Parkway has not been immune to this current recession, as evidence by our stock price currently trading well below our estimated net asset value, or market value,” he said. However, the company recently completed an $85-million common stock offering, which allowed Parkway to raise sufficient capital to be less dependent on banks. By raising capital, the company has a more conservative balance sheet, and has a stable cash dividend payout, currently yielding over eight percent annually. Parkway has adjusted to the economy by focusing on high customer retention rate, which is over 70 percent, as well as doing rate blend and extending leases. Parkway is also cutting those operational, general and administrative expenses that do not effect customer service.
Steve Rogers, another executive officer with Parkway, said there are advantages and disadvantages to being a REIT. “The advantages are many,” he said. “We have better access to common equity, preferred equity and unsecured and secured debt. Parkway has nearly $2 billion in assets under ownership and management, which gives the company the ability to source large real estate deals as well as maintain long-term relationships with many large banking institutions. Since inception, REITs have shown to be relatively stable investments for shareholders by providing a consistent cash dividend and reasonable stock appreciation based on the underlying real estate ownership risks. The disadvantages would mainly relate to the higher administrative costs of being a public versus a private company, given the New York Stock Exchange and Security Exchange Commission reporting requirements.”
Rogers added that Parkway’s long-term strategy includes operating and owning office buildings in real estate ventures with large well-funded institutional partners such as the Teacher Retirement System of Texas and the Ohio Public Employees Retirement System. This operator-owner strategy allows Parkway to earn higher recurring fees and returns while reducing the ownership risk and on-going capital requirements of the company.
“Goals at Parkway have remained simple: Own Class A office buildings in key growth markets throughout the U.S., focusing on growing rents and cash flows over time in order to maximize value and total returns to our shareholders, many of whom have been Parkway owners for years. As part of this strategy, we will continue to focus on providing quality office space and outstanding service to our customers, which number nearly 1,500 today. Customers have always and will continue to be the key to our business model,” said Rogers.
Contact MBJ staff writer Leslie Galloway at email@example.com .