Outlook Positive For Public REITs

REIT World 2009, held last week in Phoenix, saw mostly cautious optimism from real estate investment trust executives. The atmosphere was remarkably sunnier than the 2008 convention, which was held two months after the fall of Lehman Brothers. A year ago, REIT investors were worried about their investments and everyone else in the sector was worried about their jobs.

There are a lot of positives for REITs right now. The Morgan Stanley US REIT Index hit its lowest point this year on March 6. Since then, most REITs have streamlined operations, de-leveraged, paid off some debt and raised equity and are therefore less concerned about bankruptcies, defaults or the demise of the sector all together. “REITs turned a critical corner in 2009” says Debra Cafaro, ceo, Ventas and the newly elected chair of NAREIT.

In fact, the buzz in the panel discussions, the networking rooms and over cocktails revolved around what opportunities the current downturn will create for REITs. Billions of loans will be coming due, which could lead to foreclosures and banks selling at fire sale prices. “Think of it as a property buffet for REITs with dry powder” said one delegate.

Government programs, however, are making it possible for banks to extend or refinance debt on properties to keep the borrowers in a deal as long as possible. While good in theory, many borrowers are worried that the “blend and extend” loan philosophy may become “pretend and extend.” This could delay a full recovery and increase the headline risk of investing in real estate. As part of this, attendees were wondering if Developers Diversified Realty Corp.’s recent $400 million securitization, the first deal under the TALF program, will be the first of many or a one-off transaction. The other side of this is that if only a few opportunities come available, REITs will drives prices back up.

There are a myriad of other concerns that REITs are trying to tackle, including the possibility of an increase in blind-pooled initial public offerings, what the new normal activity for lending may be and the ideal amount of leverage on a property. The ballpark range from attendees was anywhere between none, 25% and as much as 45%, depending on the sector and management experience.

Finally, the macro-economic picture and commercial real estate fundamentals are a concern for all REITs, no matter what their sector. In particular, REITs are worried about high unemployment numbers, especially for those dependent on employment and consumer-driven income properties. REIT executives said they are able to keep hunkering down through 2010, if necessary, and wait to deploy new capital until 2011 or 2012. Volatility, already on the wane, is expected to be greatly reduced by the second quarter of 2010 and a silver lining for investors was a general consensus that dividends should be getting a boost towards the fourth quarter of next year.

by Joanna Randell