The REIT industry spends billions of dollars each year on capital expenditure investment. For many companies, the goal is to not only protect an asset’s competitive position in the marketplace but also drive incremental revenue growth.
REIT.com’s first article on capex investment looked at the defensive and offensive strategies surrounding investment in existing assets. This second installment continues to look at how REITs are building a strong business case for value-enhancing capex investment in areas including property refurbishment and redevelopment, and solar and technology investment.
Like any major investment, capex strategies are increasingly relying on data and analytics to identify opportunities, forecast performance, and measure the outcome on completed and stabilized initiatives. And stakeholders are paying close attention to those details.
“Investors are constantly evaluating the return prospects for the different REITs they can invest in. Part of that’s driven by the portfolios that they own, but part of it’s also driven by what they can do with fresh capital that can be allocated to new investments,” says Michael Knott, head of U.S. REIT research at Green Street.
“Those who are creating economic value through that process are going to be rewarded with a better cost of capital, a better share price, and a better NAV premium. So, it is important for the REITs to demonstrate that the investment strategy they’re pursuing is driving value,” he adds.
Many REITs are forthcoming in terms of helping investors and analysts understand the impact from capex because, at the end of the day, it’s all impacting cash flows, which is important for analysts as they’re thinking about valuation models, says Uma Moriarity, CenterSquare’s senior investment strategist and global ESG lead. “We are able to generally have conversations with the management teams and understand from a high level how they’re thinking about these types of things in a strategic way and where the priorities lie,” she adds.
Analysts also consider a company’s history of capex investing. “If a company has historically had a really strong successful program of funding capex to make sure that their assets remain competitive, in that situation, you have a little bit more trust in the management team being able to execute upon their plans,” Moriarity says. “If not, then there’s definitely a lot more scrutiny in their ability to deploy capital successfully through their capex programs.”
Continue reading for four examples of REITs that are pursuing a value-add strategy of capex investing across the residential, self-storage, health care, and retail sectors.
Veris’ $30M Investment in Liberty Towers
Veris Residential, Inc. (NYSE: VRE) is looking at capex on an annual basis and planning at least one year ahead for proposed projects. “We approach the majority of capex projects with a return on investment mindset,” says CEO Mahbod Nia. “We seek to understand what the cost is, associated benefits, as well as the risks, and then prove out the strategies, such as an increase in rent or new amenities to achieve that return,” he adds.
One example of a value-add capex investment for Veris is the refurbishment of Liberty Towers, a 20-year-old apartment property in Jersey City, New Jersey. Although the property has a desirable location and existing occupancy at about 95%, it needed upgrades. Veris embarked on a $30 million capex investment early in 2024, including a complete refurbishment of Liberty Towers’ amenity space and modernizing and updating throughout.