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.
“We’re not just making it aesthetically more appealing but we’re also changing the use in a manner that caters to the changing needs of our residents,” Nia says. For example, the property added “work pods” that can be used as co-working space and created more community spaces for activities such as arts and crafts.
The analysis for that value-add investment benefited from Veris’ visibility into market rents. The REIT owns a number of units in the area, including the luxury apartment tower Haus25. The rents at Liberty Towers were significantly discounted compared to Haus25. Although there is still going to be a discount for the older property, the refurbishment does close that gap somewhat. The REIT has said publicly that it expects to generate an internal rate of return in the high teens. The renovations and improvements also are being funded through free cash flow.
“We invest in our own properties for both maintenance and value-add capex strategies. So, not only are we able to increase the rent, but we increase the value of the building by generating more NOI,” Nia says. Refurbishment of amenities and common areas has already been completed, and units will continue to be renovated over the next two to three years as they become available.
Extra Space Generating a Return from Solar
Extra Space Storage Inc. (NYSE: EXR) allocates capital to a number of different strategic investments in its existing assets, as well as ongoing maintenance and upkeep. “We are constantly looking for investments that will help to drive the business forward,” says Kurt Gnessin, vice president of facilities at Extra Space.
For example, Extra Space has undertaken a major investment initiative for the past decade to add rooftop solar to facilities. Consistent with prior years, Extra Space invested about $30 million in new solar projects for the full year 2024. The target outcome is to achieve approximately 90% of its utility consumption with the addition of solar so that its investments produce consistent returns.
“We're very excited that we're seeing modest returns above our cost of capital,” Gnessin says. By eliminating energy consumption costs and utilizing tax credits and incentive programs, Extra Space can find dozens of properties each year where there is a good return on new solar installations. The company’s current projects have a targeted ROI of at least 12%.
The REIT also is continuing to focus on technology-related initiatives that help drive the customer experience, improve safety, and work to control loss—all of which helps ensure that revenue stays strong.
“Loss control is a big concern in the storage industry, and so investments around security and safety are a focus for investments that we’ve put in place,” Gnessin says. For example, the REIT is continuing to invest in Bluetooth technology that allows customers to access their units via their smartphone, as well as investing in more secure locking mechanisms for roll-up doors to individual units.
“We find that various customers have different needs and different desires, and some are willing to pay a premium for some of these advancements, and some are not,” Gnessin says. “So we continue to explore that as we're trying to figure out the best business case.”
Ventas Focused on Top-Line and Margin Growth
Ventas, Inc. (NYSE: VTR) is one REIT that views capex investment as an opportunity to drive top-line and margin growth. To that end, the REIT is leveraging its proprietary data analytics and operational insights platform, Ventas OI™, to inform on data-driven capex decisions that deliver both NOI growth and return on invested capital (ROIC).
Launched in 2022, the Ventas OI platform is designed to drive organic growth in the company’s senior housing operating portfolio (SHOP). The increased availability of real-time data through systems and reporting automation has enabled deep analysis into areas such as sales and price optimization, market positioning, targeted NOI-generating capex, and digital marketing, among other areas.
As it relates to NOI-generating capex and assessing which communities receive refreshed capital investments, Ventas uses the platform to analyze each community's position in the market and prioritize those where investment would most improve occupancy and rate relative to the competitive set.
According to Ventas Executive Vice President, Senior Housing and Chief Investment Officer J. Justin Hutchens, the company also analyzes overall market characteristics, including forward-looking net demand and senior population growth, home values, net worth, and affordability, among other data points, to support its position that capital would drive robust NOI growth and generate outsized returns.
For the period ranging from the beginning of 2022 through June 30, 2024, Ventas invested approximately $300 million in capex refreshment in 215 projects to enhance its senior housing communities. During its second quarter earnings call, the REIT reported results for 133 properties that were at least six months post-project completion. This group grew occupancy by more than 530 basis points and outperformed their respective markets by 350 basis points of growth. Revenue per occupied room (REVPOR) growth also increased by 6.5%.
“The power of Ventas OI is evident in our continued occupancy outperformance and nine consecutive quarters of double-digit NOI growth in our senior housing operating portfolio,” Hutchens says. “With the significant operating leverage inherent in our business, NOI should continue to expand as we reach ever higher levels of occupancy, fueled by compelling supply/demand trends in senior housing and the benefits of Ventas OI.” At the same time, residents, operators, and caregivers also benefit from capex investments that further enhance the living and working environments of its communities and their competitive position in the marketplace, he adds.
Simon Increases Density at Phipps Plaza
Simon Property Group’s (NYSE: SPG) Phipps Plaza in Atlanta’s Buckhead neighborhood serves as a case study on how replacing an empty department store with other more enticing uses can deliver both solid unit economics and improve the NOI growth prospects of an already-strong property.
Phipps Plaza recently underwent a major redevelopment to transform a former 160,000-square-foot Belk department store into 625,000 square feet of mixed-use space. The department store was razed and replaced with a higher-density development that includes a 13-story office building, a Nobu hotel, a 90,000-square-foot Life Time Athletic facility, a food hall, and outdoor plaza. According to Green Street, the total cost of the project exceeded $300 million and is expected to generate stabilized returns in the high-single-digit range.
Phipps Plaza is one of many recent examples where Simon is investing to further enhance existing assets that are already well-positioned in their respective markets. “At Simon, we consistently make strategic investments in our properties to enhance the experience for our visitors and meet their evolving needs,” says Mark Silvestri, president of development at Simon. “Additionally, having the capital to fund these investments ourselves allows us to take a long-term view of potential development projects, one of our company’s main strengths.”
The walkability aspect of the center is especially appealing to visitors, Silvestri adds. For example, people can visit their financial advisor, shop, work out, grab a quick bite at the food hall, or experience the world-renowned dining and accommodations at Nobu—all without having to drive between several different locations.
“We learn something new from every development and redevelopment project we take on and use that knowledge to inform our decisions going forward,” he says. “One specific takeaway from this project is reinforcing the popularity of additional outdoor spaces where visitors can gather and relax, an element we are incorporating into several additional projects going forward.”