Wednesday, May 20, 2009

Merrill: "Retail REITs - Tough But Stabilizing"

In his first note released in the post Sakwa world, Craig Schmidt continues to attempt to restore confidence in retail REITs. It would, after all, seem prudent to bang clients' heads into their desks until they see the light at the end of the tunnel (oncoming bullet train?) at a time when the only cash, and equity value, REITs can create is by raising expensive, dilutive equity in order to repay the cheapest form of capital (that of secured loans previously held by Mr. Schmidt uber parent, Bank of America). This is especially true, after these same clients have plunked down about $20 billion in new equity in companies that at this point exist on fumes of hope, speculation and short covering. not surprisingly, the report comes just prior to Realtors's release which indicates that Commercial Real Estate activity in Q1 fell 4.8% from Q4 of 2008 and 12.9% year over year, while vacancy rates are poised to rise to 12.1% from 9.7% last year.

While the title is expected, even Mr. Schmidt is at a loss to present the REIT "green shoots" that would substantiate his note. Amsuingly, Schmidt quotes favorable restaurant trends to back up the stabilization thesis:
Some positive signs included Dr. Mark Zandi’s (Chief Economist, Moody’s citing that restaurants reported stronger same store sales gains than supermarkets in the most recent period, which suggests an increase in consumer confidence. Additionally, retail trends, while still negative, have improved from 4Q08, which were so dramatically negative that retailers were behaving like “deer caught in the headlights.”
Now that people are rushing to Nobu, maxing out their Centurions and hoping, very much like YRC, they can apply for and receive TARP funding, all must be good. The other "solid" positive:
Of the most seriously troubled retail markets (Southern California, Florida, Phoenix and Las Vegas), the only market that seems to have improved somewhat is Southern California. We still hear very distressing things about the other markets.
Nothing like Californians spending with reckless abandon, concurrently with voting down Schwarzenneger's hail mary proposals to scrape up some semblance of a budget. Next stop: California's utter fiscal collapse, and Geithner fixing that problem as well, by securitizing all default credit cards through a AAA rated TALF issue. Now, as for that foreclosure moratorium ending in Cali - don't worry, TurboTaxTim has that covered as well: banks will hold those shadow homes on their books until such time as 10% inflation has set in and debt is worthless, just in time to reflate the next Inland Empire housing bubble. Nothing is f****d here.

Among the bullet points presented by Schmidt, who after all has to maintain some semblance of objectivity, are the following stabiliziation zingers:
  • Low attendance at annual ISCS Spring Convention shows pain
  • Leasing with already constructed projects are a priority
  • Few see recovery to positive NOI until 2010 or later
  • Downturn accelerating bifurcation of shopping centers
  • Detroit sales finally succumbs to downward pressures
  • Asset sales still hard to come by
  • Greater emphasis on service tenants
  • Thinking outside of the box becomes a necessary skill-set
  • Store closing selections may surprise outsiders
So, yes, aside from all these points, retail REITs are certainly on the road to stabilization.

Lastly, and most curiously, is the reported departure of Ross Nussbaum, yet another Bank Of America/ML REIT banker to go to... UBS, which just yesterday had virtually its entire REIT team poached by Bank Of America itself. Is this tango merely normal Wall Street rotations, or is it indicative of something deeper at Bank Of America. People are still scratching their heads over Steve Sakwa's departure. Sphere: Related Content
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