Much More Pain Ahead For REITs

Zero Hedge has written much about this so no comments here. Good article from Bloomberg summarizing the upcoming pain. Some salient quotes:

“REITs are cheap but they’re going to continue to be cheap,” said Marc Halle, managing director of Prudential Real Estate Investors in Parsippany, New Jersey, whose firm manages about $32.5 billion in real estate assets. “We’re going to see increased corporate bankruptcies and continued unemployment for the next few months.”

More than a dozen retailers, including Circuit City Stores Inc. and Linens ‘n Things Inc., filed for bankruptcy protection in 2008. Store closures have hit shopping center landlords including Developers Diversified Realty Corp., whose stock fell 95 percent during the past year to $1.89.

The dividend yield on the retail REIT index is almost 15 percent, more than five times the 2.88 percent yield of the 10- year Treasury note, a traditional benchmark of value. During the past decade, REIT yields averaged less than 2 percentage points above Treasury yields.

Retail REITs are worse off because they borrowed more heavily than apartment and health care landlords, said Dean Frankel, a senior portfolio manager at Urdang Securities who helps manage about $1 billion of real estate securities.

Refinancing Risk

The real estate market has been in limbo while investors await government measures to deal with the collapse of the banking industry and boost an economy in its second year of recession.

Refinancing risk is driving REIT prices, said Prudential’s Halle.

“No one cares about value,” he said. “It’s about survival and making your balance sheet as strong as you can.”

disclosure: long SRS Sphere: Related Content

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REITs Next To Receive Bail-Out Funding?

REITs are in trouble. Let me paraphrase that - REITs are in very big trouble. These companies whose very existence presumes significant equity value in their underlying investments are feeling a lot of pain these days with commercial mortgages on the verge of a default tsunami. DSCR ratios at most of the CMBS issued in the past 2-3 years are approaching 1 or are already below 1, meaning they don't generate enough rent to cover interest expense, also meaning that not only is the debt probably impaired in most CMBS tranches, but the equity value is non existent and thus REITs have to hunker down in order to survive. Will be interested to see how successful they are.

In the meantime, REITs have in fact started to conserve cash by paying out dividends mostly in stock. The most recent culprit of dividend PIKing is Vornado, which last Wednesday announced that out of its $0.95 dividend, only 40% will be paid in cash. And as reitwrecks points out very astutely, shareholders need to raise cash to pay income tax on the value of the stock the receive.

We would be very cautious the REIT space overall, and believe that a good way to hedge real estate exposure is via the SRS etf which we already wrote about. We also recommend a careful read of the posts in reitwrecks - a very good analysis of recent events in the space.

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