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Back From The Brink?

Investors rush in as REITs shed risk.

investment vehicles, such as collateralized debt obligations, are still buried under the rubble of the U.S. financial implosion, real estate investment trusts (REITs) appear to be emerging from the dust.

“The one thing that we see that's been surprising is the extent and the quickness with which these REITs have been able to solve their debt maturity issues,” says Ralph Block, CEO of Essential REIT Publishing in Westlake Village, Calif.

After stock prices across the industry plummeted by nearly 90 percent from their peak in 2007, overleveraged REITs and public real estate companies last year began massive recapitalization campaigns, raising some $37.5 billion through secondary stock offerings, discounted debt buybacks and property sales. Today, debt ratios on average for equity REITs are 49 percent, down from 58 percent at the beginning of the year.

Instead of scaring investors away with heavy debt and billions of dollars in looming maturities, the strongest REITs have amassed large stockpiles of equity with the intent of growing through acquisition of attractively priced assets. Simon Property Group (NYSE: SPG), whose pockets are bulging with about $7.4 billion in spending power, may be the most public example.

Only a few high-quality distressed properties have come to market so far. The assets that have been put up for sale have faced strong competition from other well-capitalized buyers, including foreign, institutional and private equity investors.

Public equity REITs also will face stiff competition on the acquisitions front from new blank-check REITs, like Pebblebrook Hotel Trust (NYSE: PEB), which launched its IPO in early December, raising $350 million to acquire upscale hotels in major cities.

Meanwhile, investors have gained confidence in the REIT sector. Stock prices industry-wide rose by 124 percent from March 9, 2009 to March 13 of this year. Despite the improvement, however, it is worth noting that prices are still down 44 percent from their peak, hit on Feb. 7, 2007.

This year, investors will see dividends improve after many REITs hacked dividend payments to little or nothing. “The average REIT dividend will be increased by 25 percent this year, I don't think that's really recognized in the market,” says David Fick, managing director of investment banking firm Stifel, Nicolaus & Co. based in St. Louis, in a recent research report.

Hefty dividends in the current market, however, do not necessarily equate to healthy REITs. Some of the worst performing stocks over the last six months have been the best-capitalized REITs. By and large the “best” performers by stock price, says Block, jumped in value because they were in the most precarious position and returns had a lot of room to grow.

Bullish investors are in REITs for the long haul, and believe that the real estate fundamentals are bottoming. What's more, a limited amount of new construction will come on line in the next couple of years, Block says. “That will occur at a time when the economic recovery is going to be stronger than it's going to be in 2010.”

p. 54/Debunking REIT Myths

p. 60/Hedging Inflation

p. 63/Hotel REITs on the Comeback Trail?

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