Tuesday, January 20, 2009

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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Anonymous said...

If the banks are reclassifying massive amounts of assets from "available for sale" to "held to maturity", I would expect REITS to do the same. Thus avoiding mark to market acounting and creating some realistic breathing space.