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 Despite bumps, some public real estate investment trusts have access to capital and are ready for action

 By Jan Buchholz Phoenix Business Journal 09.25.09 

Phoenix real estate experts expect publicly traded real estate investment trusts, or REITs, to play a significant role in stabilizing the death spiral that is wreaking havoc in the commercial real estate market.

At this moment in U.S. economic his­tory, some REITs are poised to take action. Unlike many private real estate investment firms or large investment funds that have been hit by the lingering credit freeze, REITs can generate spending money by selling new shares of stock. And those that shunned Phoenix in the past or left during the last heated market cycle are taking another look.

“A lot are coming back in and looking at this market,” said Bob Young, senior vice president of CB Richard Ellis in Phoenix . “REIT transactions are way down, but REITs probably are more active than other groups. They’re trying to be proactive and to have cash on hand.”

Though none of the largest publicly traded REITs are based in Arizona , several have significant holdings in the Phoenix market, including:

• Liberty Property Trust, which has a regional office here and specializes in office and industrial properties.

• Apartment Investment and Management Co., Camden Property Trust and Equity Residential, all owners of apartment complexes.

• Developers Diversified Realty and Kimco Realty, owners of neighborhood shopping centers.

• Macerich Co., owner of large shopping centers and regional malls.

• Prologis, owner of industrial and warehouse properties.

• Public Storage, owner of self-storage facilities.

• FelCor Lodging and Host Hotels & Resorts, owners of hospitality properties.

• HCP and Health Care REIT, owners of health care facilities.

What is a REIT?

Outwardly, REITs buy and sell properties just like any individual or company, but underneath the traditional transactions are certain market dynamics that put them in a league of their own.

For starters, REITs are capitalized through stock offerings, with the lion’s share traded on the New York Stock Exchange and a handful traded on Nasdaq and the American Stock Exchange. With that money, REITs buy properties that they manage and later sell at an optimal time. Most REITs acquire property-specific portfolios. For instance, many of the large national apartment property owners are REITs.

Dionisio Meneses, managing director of real estate investments and research at Charles Schwab in Phoenix, said REITs are more flexible than other investment vehicles because they have access to capital, though probably less than before.

There are several reasons most REITs have money on hand. The stock market has been gaining ground for months, so they have been able to raise capital through stock offerings.

In addition, REITs generally have weathered the commercial real estate crisis better than other investors because federal laws govern the amount of leverage they can apply to any given transaction. Thus, as other players raced headlong into a pitch of overinflated deals, REITs were unable to join the frenzy.

Beside being hemmed in by rules and regulations, REITs also are beholden to their shareholders and thus tend to be more conservative.

While REITs may have been forced to walk away from the table during the height of the commercial real estate bidding wars three and four years ago, REIT executives now may be secretively relieved. That restraint, welcome or not, preserved them from the fates of many private real estate companies now facing extinction.

“The story here is that REITs are able to meet debt obligations. They’re not going to go bankrupt,” said Brad Case, vice president of research and industry information for the National Association of Real Estate Investment Trusts. “Investors don’t have concerns about bankruptcies and defaults with publicly traded REITs.”

Steady gains

That’s not to say REITs have not had their own roller-coaster ride. Publicly traded REIT stocks hit a historic average low on March 6, but since then have enjoyed steady gains as a whole.

“We see that as being the low that will not be tested,” Meneses said.

He does not believe there will be a huge increase in REIT stock prices — “they’ve already had such a good run-up” — but he still thinks they will continue to be a good buy for investors.

“They’ve outperformed other stocks this year ... there still is value to be had,” he said.

While the news looks good for shareholders, how will the REITs’ relative vitality play into the local commercial real estate market?

“The public companies will take advantage of private companies that are in distress. We haven’t really seen that so much yet, but when the private companies have to refinance a property, that’s where the distress will come in,” Meneses said.

Thus, local commercial property owners in danger of defaulting on loans may look to REITs to buy them out.

But the property would have to be among the tops in its class. REITs typically purchase elite properties in specific categories in larger metro areas. They own an estimated 10 percent to 15 percent of the national commercial real estate market, according to several sources, and could gain increasing market share during the expected slow economic recovery.

Valley players

REITs will benefit even if there isn’t a wave of distressed commercial properties, as many economists and analysts fear.

“If the market starts to get better, then the REITs will be in a better position to raise capital,” said CBRE’s Young.

In fact, Young has high hopes for REITs becoming even larger players in the Phoenix market.

“I expect them to be one of the earliest back in the market buying substantial properties,” he said.

Back in the early 1990s, when the commercial real estate market was reeling from the effects of the savings-and-loan collapse, REITs jump-started the local market.

“They were one of the largest buyers in the market then, and I fully expect that it will be the same this time,” Young said.

In the coming months, expect to see more publicly traded REITs enter or re-enter the Phoenix market with the prospect of landing prime properties that owners are selling under duress.

“Transactional volume has been very weak, but the driver now will be debt obligations,” Case said. “There will be buyers.”

Related Event

What: REITWorld 2009, the National Association of Real Estate Investment Trusts annual convention for all things REIT
When: Nov. 11-13
Where: JW Marriott Desert Ridge Resort & Spa, Phoenix
Why: To meet and network with senior management representatives of REITs and publicly traded real estate companies representing more than $500 billion in assets. Sessions will cover topics ranging from the state of the industry to re-equitized and post-modern REITs.
For more: National Association of Real Estate Investment Trusts, www.reit.com

Glossary of Terms

REAL ESTATE INVESTMENT TRUST: Investment vehicle created by an act of Congress in 1960, designed to provide investors with the opportunity to participate directly in the ownership or financing of real estate projects through a tradable interest in the pool of real estate-related assets. REITs pay dividends on income produced by the properties they own.

Listed public REIT: A REIT that is registered with the U.S. Securities and Exchange Commission and trades on a public exchange.

Unlisted, nonexchanged REIT: A REIT that has filed a registration statement with the SEC and files periodic reports, but is not publicly traded on an exchange.

Private REIT: Privately held REITs are not subject to public disclosure and have no obligation to register with the SEC. They are not traded on any exchange and have no public market.

Yields: REIT stock investors are motivated mostly by the annual dividends paid by REITs, which on average outperform other dividend-paying stocks. Typically, REIT stocks return between 6 percent and 7 percent
a year, compared with other Standard & Poor’s
dividend-paying stocks, which average a 2 percent yield. REIT dividends are fully taxable, however.
Share gains: Earnings growth historically is slower than with other stocks, but REITs have posted above-average share price increases in recent years and have produced above-average returns for decades, both in strong and weak markets.

Risk: REITs are not without risk. The run-up in REIT stock prices may not be supported if fundamentals in the real estate market continue to be weak or erode further. Be selective in picking REIT stocks by examining both dividends and share appreciation. REITs with long track records of steady dividend growth are probably the best picks.

Source: StreetAuthority.com

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