Green Street’s Sullivan says REIT Spinoffs Fueled by High Prices, Wide Earnings Multiples

Jim Sullivan, managing director at Green Street Advisors, joined REIT.com for a video interview at REITWorld 2015: NAREIT’s Annual Convention for All Things REIT at the Wynn Las Vegas.

Sullivan addressed the factors behind the current interest in REIT spinoffs.

“Real estate prices have never been higher,” Sullivan said. He noted that the Green Street Commercial Property Price Index concludes that real estate pricing in the United States is on average 20 percent higher than at the 2007 peak. “High prices are a primary driver.”

At the same time, earnings multiples between publically traded REITs and public operating companies are wider than they have typically been, according to Sullivan.

“It’s only natural that companies not in the real estate business, but that happen to own a lot of real estate, are looking at their real estate maximization opportunities – one of which is a REIT spinoff,” Sullivan said.

Sullivan stressed that the decision to proceed with a REIT spinoff is very company-specific. For some companies, a REIT spinoff or conversion will be the right path, he said. For others, however, more traditional real estate financing such as a joint venture, sale leaseback or mortgage financing would be better. For certain operating companies, especially those with strong balance sheets, more traditional financing, including the unsecured debt market, could be the right option, Sullivan observed.

As for market reaction to REIT spinoffs, Sullivan observed that REIT investors like simple concepts and are comfortable with certain property types. “If the spinoffs or conversions involve property types they are familiar with, they’ll be welcomed with open arms.”

Spinoffs involving more unfamiliar property types place an onus on the company to explain their strategy to REIT investors and help them understand how to value the assets, Sullivan said.

Meanwhile, Sullivan said he would advise any company contemplating a REIT spinoff to invest the time necessary to fully understand the nature of its real estate assets.

Sullivan said companies that don’t invest this time run the risk of being upstaged by an activist investor, eager to unlock value for the company.

“Companies should control the message and the first step to doing that is understanding the real estate,” Sullivan stressed.