COVER STORY, JUNE 2004

THE REIT ADVANTAGE
Southeast REITs stake out new developments and markets.
Luci Joullian

In order for a real estate investment trust (REIT) to survive, it must inspire confidence in and attract new investors that might not be able to own large-scale real estate investments on their own — or dispose of existing assets to fund new developments or acquisitions.

Unlike other real estate companies, REITs are beholden to their pool of shareholders and must strategize to make the right move to protect not only their own interests in their company, but also those of the shareholders.

Indianapolis-based Duke Realty Corporation predicates its success on office and industrial developments.

Peck

“Our history is primarily as a developer. That’s one of our strengths,” says Tom Peck, Duke’s senior vice president of investor relations. “We’ve grown largely through development. That’s been our most profitable source of growth.”

Formed in 1972 and first traded publicly in 1993, Duke began primarily as an industrial developer and then moved into developing office properties as well. Since going public, Duke has completed more than $3.3 billion worth of development.

Peck says that the REIT, which focuses on developing in the Midwest and Southeast, does about 50 percent of its business in office properties and the remaining half in industrial.

Focusing primarily on suburban offices and warehouse/distribution-type buildings, Duke has room to grow. Right now, the company has more than $350 million of undeveloped land holdings. Having a specialized construction department, which has 12 offices and also does third-party construction for other companies, also helps Duke achieve its development goals.

“We’ve got one of the most integrated construction operations that you will find in the REIT sectors,” says Peck.

And although it’s not Duke’s bread and butter, the REIT also “likes to make acquisitions when we can, when we find the correct pricing,” says Peck. But, he notes, “Relative to other companies where that’s the main means of growth, for us, that supplements our development activities.”

He notes that development in general has been down because of a slow economy and that, right now, Duke is focusing on industrial development — what Peck calls, “by and large, the stronger property type” — and also office development, which he notes has recently lagged behind, a trend he says is not only common in the Southeast but also throughout the country.

Peck says that, in particular, Atlanta, where Duke does about 14 percent of its business, is starting to show a turnaround in industrial and office activity.

Currently in Atlanta, Duke is developing a 100,000-square-foot industrial building for Weyerhaeuser, due to be complete this September. Last month, in nearby Gwinnett County, Duke completed a 50,000-square-foot office building, which is already 100 percent leased, in the 416-acre Huntcrest master-planned development.

“Atlanta’s been one of the better job growth markets around, and that’s having a nice impact, so we’re happy to see Atlanta showing more strength,” says Peck. “That’s been a bright spot for us, having office perform reasonably well in Atlanta.”

Duke has ventured outside the Atlanta area into Orlando, Florida, to construct a recently completed 78,000-square-foot office building for CuraScript Pharmacy and a 100,000-square-foot office build-to-suit, due to be complete in September, for Edwards Systems Technologies. The REIT is also working on a 48,000-square-foot industrial building in Raleigh, North Carolina, that is 50 percent pre-leased.

“For us, that would be a below-average level of activity,” says Peck of Duke’s recent developments. “There are less businesses needing to expand and there’s more space available in existing buildings. But, with the economy picking up, we’re hopeful that development activity will pick up as well.”

Jacksonville, Florida-based Regency Centers is another REIT that is currently focusing on development and letting acquisitions take a back seat.

Euart

Despite a soft market, “we have a significant pipeline of projects,” says John Euart, Regency’s managing director of investments for the Southeast region. “We also acquire properties, but the acquisition market over the last year or two has been very pricey, so we’ve been somewhat selective in what we’ve been able to pursue.”

With offices all over the country, Regency — owner and manager of grocery-anchored shopping centers — was founded in 1963 and, in 1993, went public.

Regency’s ability to develop many new projects can be partially accounted for by the fact that the REIT is focusing on the growing Florida market for many of its new grocery-anchored projects.

“Florida, at least parts of it, is what you would call a hot spot, because there’s so much growth occurring and you can justify continuing to build grocery-anchored centers,” says Euart.

“We’re really excited about the Southwest Florida market. We’ve done a few projects down there and we’re very active in looking to do more projects,” he continues. “Central Florida seems to have recovered from the 9/11 hangover, especially Orlando, and Jacksonville has really been a good market for us.”

In its home base of Jacksonville, Regency is developing Johns Creek, a Publix-anchored center that has about 25,000 square feet of shops and three outparcels, which should be complete this November. The company has also begun construction on an adjacent piece of property called St. Johns annex, which will include 15,000 square feet of retail and one outparcel and will be complete by the first quarter of 2005.

“We feel like we are creating so much value with the grocery-anchored center that we’re going to go ahead and take down the adjacent property and build something there also,” says Euart.

In Wellington, Florida, a suburb of West Palm Beach, Regency Centers is planning to refurbish its Publix-anchored Wellington Town Square, tearing down the outdated Publix and building a new one.

In the West Palm Beach suburb of Wellington, Florida, Regency has plans to refurbish its Publix-anchored Wellington Town Square, tearing down the outdated Publix and building a new one.

“It really affirms the value of the underlying real estate,” says Euart. “When that’s done, the entire shopping center will take on a new look.”

Atlanta is a market that Euart considers “over-stored” right now. “We’re seeing a lot more sites get torn down than approved, and a lot of it has to do with just the sheer number of stores that are already in the market,” he says of the Atlanta-area grocery center market.

Besides various Florida markets, Regency is also building in South Carolina and Alabama and focusing on emerging markets like Nashville, Tennessee, a market where longtime Regency anchor Publix was recently introduced.

Regency has an office in Raleigh, North Carolina, another emerging market. “We just think that’s such a dynamic market,” says Euart. “It’s had a tremendous amount of growth and you’ve got some very good grocers up there — Kroger, Harris Teeter, Whole Foods.”

Regency’s tenant-focused approach to development and acquisition is something that Atlanta-based Wells Real Estate Funds and its subsidiaries Wells REIT I and Wells REIT II share.

Steinwedell

“We’re an office and industrial investor, what we like to call a core investor, which is defined by Class A properties and good locations with high-quality tenants,” says David Steinwedell, Wells Real Estate Fund’s chief investment officer. “The tenancy and the quality of the property both define what’s core and what’s important to us.”

With a financial stake in properties throughout the country, Steinwedell notes that Wells, which was founded in 1984, is dealing with similar challenges as other REITs in a slow economy.

“It’s the fact that you’ve got fundamentals that are just beginning to turn around. You’ve got absorption just beginning to kick-in in markets and vacancy rates that are flattening out,” he says.

However, says Steinwedell, Wells’ focus on Class A properties is what gives the REIT a competitive edge.

“The investment and the acquisition markets remain pretty competitive in both office and industrial for the higher quality properties,” he says. “That’s true whether you’re in Charlotte or Miami.”

Steinwedell says he still considers Atlanta a great market for office and industrial properties, even though “the development pipeline has slowed down dramatically across the Southeast and in Atlanta as well, in direct response to the softening of the market.”

However, “Atlanta remains the capital of the south,” he adds. “Job growth is showing signs of rebounding, and there’s a direct impact from job growth in terms of use of office and industrial space.”

In the Atlanta suburb of Douglasville, Wells recently acquired the 593,404-square-foot New Manchester One industrial building, which serves as the East Coast distribution hub for JVC Americas Corp.

Another major coup for Wells was its mid-2003 purchase of Glenridge Highlands Two, a 400,000-square-foot, 19-story, Class A building, otherwise known as the Cingular building, in Atlanta. The property is the national headquarters for Cingular Wireless, which occupies 313,927 square feet of the building.

“It’s a great little market,” says Steinwedell of the Glenridge market, located just north of Atlanta’s Buckhead area.

“The real nice thing about this property is that it’s got exceptional visibility and just fantastic access,” he says of the Cingular building, which is located near Interstate 285 and Georgia 400, two of Atlanta’s major traffic arteries.

“One of the challenges in Atlanta is the traffic,” says Steinwedell. “With this property, you can get out, get on the highway and get going where you need to go.”

Despite Wells’ recent acquisition of an Orlando office property, tenanted by Siemens, like many other REITs Steinwedell says Wells would like to be more active in Florida.

“Miami, Tampa and Orlando, we’d really like to see more activity there,” he says. “Long term, I think those markets are going to do extremely well — Miami with its focus on Central and South America, or Orlando and Tampa in terms of back operations and call centers.”

No matter what the market, though, Wells will keep its tenant-first philosophy in place.

“Our acquisition process is different from a lot folks in that we’re driven by the quality of the tenant. We underwrite the tenants in place in terms of their credit quality before we even get into significant underwriting of the financial aspects of the building,” says Steinwedell. “A lot of other firms will fall in love with the building first. We tend to fall in love with the credit first and then move on to the real estate itself.”

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