REIT Players Crossing Fingers The Worst Is Over
June 05 2009 - 2:03PM
Dow Jones News
What a difference six months makes.
The pervading sense of doom that permeated the National
Association of Real Estate Investment Trusts conference in November
was missing during REIT Week this week in New York, with chief
executives, Wall Street analysts and economists waxing poetic about
the potential for acquisitions and massive deleveraging while
noting that challenges remain ahead.
"The financial Armageddon scenario is over," Michael Fascitelli,
Vornado Realty Trust's (VNO) chief executive, said on the sidelines
of the three-day conference that concluded Friday morning at the
Waldorf Astoria. "The risk for survival is out of the market."
Mitchell Hersh, president and chief executive of Mack-Cali
Realty Corp. (CLI), a New Jersey-based office REIT, said during an
interview "there has been renewed confidence that access to capital
exists."
Until March, REITs had been hammered amid concerns about the
financial services industry as well as commercial real estate
malaise as a continuing credit crunch made it difficult to
refinance upcoming debt maturities. The industry's saving grace has
been massive amounts of equity issuance allowing REITs more
flexibility to reduce debt.
Since the beginning of the year, REITs executed 45 common stock
offerings through May, raising some $14.2 billion in capital,
according to NAREIT. By comparison, there were 76 offerings in all
of 2008 totaling $14.5 billion. The optimistic tone has fueled REIT
prices higher by 54% since March 6 - where many experts say a
bottom was hit - through May, according to the FTSE NAREIT All
REITs Index.
Amid concerns about overvaluation, the financial services
market, the recession and credit risk, equity REITs fell 15.7% in
2007 and 37.7% in 2008.
REITs, which own about $600 billion of commercial real-estate
assets, were established in the 1960s to give individuals an easy
way to invest in income-producing real estate. Such companies
typically focus on distinct areas of property, such as offices,
retail or apartments.
Drawing parallels from the real-estate crisis in the early
1990s, REITs are expected to use equity issuances to finance
acquisitions and bring leverage down to 25% by the second-quarter
of 2010, according to a new analysis presented by NAREIT during the
conference.
The organization said such re-equitization and lower debt ratios
could pave the way for $582 billion to be on tap for acquisitions
by the end of 2012. And acquisitions, initial public offerings and
increased market capitalization could push the REIT composition of
the broader commercial real estate market to roughly 30% by the end
of 2012 from roughly 5% currently, based on market capitalization,
says NAREIT.
But, the economy is still the 800-pound guerrilla in the room.
NAREIT's assumptions don't take into account economic factors and
market participants say that job growth and the health of the
economy will ultimately determine the trajectory for REITs.
"I wouldn't be in a rush if I were a CEO," said Mike Kirby,
director of research at Green Street Advisors, during a panel
discussion Wednesday. He noted that REITs still need to continue to
fix their balance sheets. "Distress isn't here yet."
He said he thinks the pace of acquisitions will be less than
what the market anticipates: "No one wants somebody else's balance
sheet" in this environment.
Mack-Cali's Hersh said that when the company moves to spend
capital, they need to have adequate replacement costs.
"We are going to be very, very careful," he said.
-By A.D. Pruitt, Dow Jones Newswires, 201-938-2269,
angela.pruitt@dowjones.com