David Faber On Goldman CRE Write Downs And REIT Pain

David Faber discusses Goldman's real estate losses, and draws some conclusions about the upcoming pain for REITs. And yet, thanks to Goldman, which has been instrumental in upgrading and issuing stock for the REITs (and having a massive blow out quarter thanks in large part to its REIT underwriting activity), the sector is doing unprecedentedly well. Surely one has to wonder just what must happen at this point for people to wake up and realize what a ticking time bomb Commercial REITs are?

By the way, Jonathan, the Zero Hedge brain trust believes it is about time to downgrade your former Conviction Buy CBL soon (this is obviously not a threat or advice, investment or otherwise).

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REIT Liquidity Update: Hold The Applause

If anyone had told us a year ago that Fitch would at least attempt to be a voice of reason, while Merrill Lynch, which has gotten destroyed on real estate, would be a CRE permabull, we would have punched them in the face. Alas, this seems to have become the case. While readers are all to aware of Zero Hedge's coverage of the Merrill REIT team's follies in "analysis land", a Fitch piece from last week has some surprisingly insightful commentary on REIT. In a report titled "U.S. Equity REIT Liquidity Update: Hold the Applause" the rating agency paints a much more detailed and credible picture than i) expected and ii) than the 20 brand new analysts at ML/BofA could come up with.

From the report:

Challenges remain, including:

• Tenuous financing available across the capital markets.

• Deteriorating performance in commercial real estate and the sizable overhang of debt maturities for equity REITs looming in 2011.

• Limited visibility regarding net operating income capitalization rates, which continues to stress commercial property values constraining the magnitude of institutional investor-secured debt lending volume.

Also included is a pretty extensive laundry list for all the companies out there who still have not used ML's magical stock underwriting services.

• Likely Reduced Revolving Credit Facility Commitments: Most REITs’ unsecured revolving credit facilities mature beyond Dec. 31, 2010. Within the tables on page 47, Fitch has reduced the borrowing capacity under revolving lines of credit by 33% for REITs that have revolving lines of credit that mature before Dec. 31, 2010 after taking into account extension options for illustrative purposes. This capacity reduction reflects a “what if” scenario for certain REITs as revolving credit facility maturities approach. While a limited number of REITs have either recently extended or increased the borrowing capacity under such revolving facilities, Fitch believes that many of these facilities will be reduced in size. For its rated universe, Fitch does not believe that many of these facilities will be converted from unsecured to secured given the strong lending relationships most of the seissuers have with their banking groups. That said, for weaker issuers across the equity REIT universe, the prevalence of secured credit facilities will likely increase given banks’ limited capital and concerns regarding borrower credit.
  

• Limited Unsecured Bond Issuances: Recent unsecured bond issuances do not constitute a panacea for REIT liquidity, as the unsecured bond market remains unattractive to most equity REITs. Credit spreads have tightened, but indicative pricing across the industry remains unattractive to many companies, particularly relative to secured debt.

• Near-Dormant CMBS Market: Liquidity remains weak in certain areas such as secured funding in the commercial mortgage-backed securities (CMBS) market. Although the inclusion of legacy CMBS for eligibility under the Federal Reserve’s Term Asset Backed Securities Loan Facility beginning in July may play a role in the restoration of investor confidence in commercial real estate, CMBS issuance volumes are highly unlikely to be restored to pre-2008 levels.

• Reduced Bond Tender Activity: While $2.8 billion in bond tender offers executed year to date have allowed companies to reduce uses of liquidity, such transactions have been a byproduct of bonds trading at discounts to par, which have included securities issued by REITs with below-investment-grade issuer default ratings (IDRs). Spreads have tightened recently, shrinking the arbitrage opportunity bond tenders present.
  

• Uncertain Common Equity Issuance: With $12.4 billion in new equity raised year to date by REITs, the re-equitization wave has enabled REITs to strengthen their capital bases. However, investor demand may be driven in part by low share prices relative to net asset values, while share prices of certain other equity REITs are such that prospective equity issuances are unlikely.

And some more good insight:

Encouraging Signs Are Not Ubiquitous

Year to date, 18 REITs have launched tender offers to repurchase approximately $7.0 billion of outstanding bonds and have tendered for approximately $3.1 billion of securities. Many REITs that have launched tender offers have IDRs in the ‘BBB’ rating category. Fitch’s ratings for REITs that have launched tender offers range widely, from Public Storage (which has an IDR of ‘A’ by Fitch, with a Stable Rating Outlook) to Centro NP LLC (which has an IDR of ‘CCC’ by Fitch, with a Negative Rating Outlook). Fitch views consummated tender offers as encouraging in that they demonstrate REITs’ ability to reduce their future funding obligations and temporarily reduce cash interest expense by utilizing low-cost unsecured lines of credit. Such tender offers have been affected by REITs with capacity under their credit facilities. REITs that have not executed tender offers may have limited liquidity to launch tender offers, while others have shorter tem funding needs to address.

Similarly, the equity issuance wave has been encouraging for REIT liquidity, as year to date, 38 REITs have raised an aggregate of approximately $12.8 billion in proceeds. With certain companies reluctant to issue at these prices

It will be interesting what everyone will be saying about REITs in a few months when the impacts of the recent hotel bankruptcies start reverberating through the system, and the full scale of the massive overhang of excess inventory in major metropolitan areas become fully flushed out. Sphere: Related Content

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Merrill On REITs: "Just First Of Several Rounds Of Follow Ons"

Straight from the horse's mouth, viewers can gleen the most "unbiased" perspective on the strength of the REIT market, who the investors are who are so happy to throw their money on the REIT equity offering bandwagon, and just how many more waves (after waves) of follow ons can be expected.

Compliments of Ron Sturzenegger, MD and Global Head of Real Estate, Gaming and Lodging and Jeff Horowitz, Managing Director & Head of Americas Real Estate And Loding, both at Merrill/BofA.

Watch the propaganda free clip here.

hat tip Pat Sphere: Related Content

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Has The Merrill REIT Equity Offering Well Run Dry?

In a surprising development on the REIT scene, today the Omaha World Herald announced that Merrill REIT group darling Simon Property Group is selling the Crossroad Mall in Omaha on 72nd and Dodge Streets. With tenants such as Finish Line, LensCrafters, Old Navy, Victoria' Secret and near bankruptcy Claire's, it is not too hard to see why the mall has fallen on hard times.

What is mildly troubling is that Crossroads is located less than three miles away from the famous Borsheim's store at 120 Regency Parkway where the annual BRK B share circle jerk takes place, and where Becky Quicky has a lifetime 100% discount.



What should be much more troubling (especially to holders of REIT stocks), is that instead of simply doing a tactical drive by follow on offering (we are talking $$$ peanuts here), SPG is forced to stoop to the level of actually selling assets for cash. What's wrong - not enough ammo left to institute a little REIT short squeeze? Someone is slipping.

Back to the mall - Omaha Herald notes that the price will be "market value" and that in 2002 the mall was appraised for $57.1 million "according to a JP Morgan" report. Add this to the increasingly larger number of CRE market tests currently percolating in the market place: someone may be very unpleasantly surprised with the price this (and other) mall fetches. Also, whatever happened with the whole premise that SPG would be an acquiror for real estate? Uhm, doesn't this refute both the "logic" of both NAREIT and the most recent Merrill upgrade, and I quote:

"We are moving from Neutral to Buy on Simon given the company’s opportunity to boost external growth (and improve SPG’s core U.S. portfolio) as they prepare to become a major player in the emerging “M&A” market in U.S. retail real estate."

Sooo.... Schmidt was actually referring to the company being a divestor of assets, not acquirer....honest mistake - now it all makes sense. Sphere: Related Content

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Random Walk Down Madison Avenue's Golden Mile

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Mack-Cali Late To The Follow On Party

But better late than never, especially when you have the REIT dilution powerhouse behind you. CLI just announced it will issue a total of 7,475,000 shares with Merrill as lead underwriter. Use of proceeds: "To repay borrowings under its unsecured revolving credit facility" which has as syndication agent...pause... Bank Of America. Unfortunately the $180 million of max proceeds will not really help BofA with their total bank exposure... Curiously CLI is not even covered by the dynamic ML REIT duo of SS (Schmidt-Sakwa). Which does not mean the two have not been busy - here are their latest actions over just the past 3 days - finding the mildly optimistic report is harder than Where's Waldo:

Duke Realty: We are raising our '09 and '10 estimates while our PO increases from $9 to $10. Maintain Neutral rating.

Kimco: Maintaining Buy rating due to the KIMs improved balance sheet strength as a result of its add-on offering. While retail fundamentals should remain weak for 09, KIMs should be one of the survivors.

Boston Properties: BXP's 1Q results solid; increasing FFO. BXP reported normalized 1Q09 FFOPS of $1.30/share when you exclude the $0.19 one-time, non-cash impairment charge related to the suspension of construction at 250 West 55th Street.

ProLogis Trust: Significant progress toward deleveraging. PLD has taken meaningful steps to improve its balance sheet although it comes with a near-term cost of earnings dilution. We are trimming our '09 and '10 estimates while our PO falls to $9.50.

Avalon Bay: Despite stronger than expected Q1 results we are lowering our rating from Buy to Neutral due to the recent stock price gains coupled with weakening fundamentals. Our new PO is $55 (up from $49).

Equity Residential: EQR reported 1Q09 FFO of $0.57 which was a few pennies above our forecast. We are raising our '09 and '10 FFO estimates by a nickel while our PO increases from $18.00 to $18.50.

Corporate Office Properties Trust: OFC reported $0.67, $0.08 ahead of our estimate. We maintain our 09 estimate of $2.41 while our NAV stays flat at $21 and our PO remains at $22, in line with our forward NAV estimate

Weingarten Realty: Maintaining 09 Est., despite 1Q surprise: We are maintaining our price objective of $13 for WRI. This assumes a 5% discount to its forward NAV. Maintain Underperform based on PO and WRI recent outperformance of REIT sector.

AMB Property Corp: Well positioned to weather the storm: AMB reported better than expected Q1 results due to higher than expected gains on development sales. We are maintaining our Neutral rating but raising our PO from $16 to $19 per share.

SL Green: SLG's results beat on one-time items. SLG reported 1Q09 FFO of $1.48. We are increasing our 09 FFOPS estimate by $0.17 to $5.67, while our PO increased $2 to $16.50, in line with our forward NAV estimate.


Now that all REITs are solidly recapitalized and chasing the 3 still non-bankrupt retail tenants with 100%-off rent offers, maybe it is time for the custodians to allow investors to short again. One of these days SPY and IWR may finally not be Hard To Borrow - who knows?

Mack-Cali Realty Corporation Announces Commencement of Public Offering of Common Stock

Business Wire

EDISON, N.J. -- April 30, 2009

Mack-Cali Realty Corporation (the “Company”) (NYSE: CLI) today announced that it has commenced a public offering of 6,500,000 shares of common stock. In addition, the Company expects to grant to the underwriters for the public offering an option for 30 days to purchase up to 975,000 additional shares of common stock to cover overallotments, if any. Merrill Lynch & Co. and Deutsche Bank Securities will serve as the joint book-running managers.

The Company plans to use the net proceeds from the offering to repay borrowings under its unsecured revolving credit facility and for general corporate purposes.

This offering will be made pursuant to a prospectus supplement to the Company’s prospectus, dated November 26, 2008, filed as part of the Company’s effective $2 billion shelf registration statement. This press release shall not constitute an offer to sell or the solicitation of an offer to buy any securities nor will there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

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Is There A REIT Reverse Inquiry Conspiracy?

As documented previously on Zero Hedge, concern #1 by a large margin for the administration is the issue of commercial real estate, and more specifically the disconnect between price discovery of CRE securities (especially in equities) and their deteriorating cash flow fundamentals. Investors who have actually done their homework and have established directional bets on CRE valuations, have, over the past month, been left wondering how it is possible that equity prices of REITs and other leveraged plays on CRE could possible be skyrocketing by over 100%, despite massive rolling dilutions and increasing fundamental weakness. Additionally, for all practical purposes, recent equity raises have been used merely to pay down secured debt financing (for the benefit exclusively of underwriter banks). As REIT analysts at Merrill Lynch would be happy to attest, the "improved" balance sheets, at best afford these companies several quarters of time, absent wholesale deleveraging (in or out of court), as declining FFO coupled with massive interest expense simply means that these credit facilities will only end up getting drawn down again sooner rather than later.

In this sense the equity raises are merely a desperate attempt by a select few fund managers who are massively underwater on their REIT bets, to prop up stock prices (after all these funds have some very concerned LPs they need to answer to, and as there is a monthly P&L reporting obligation, their very viability depends on posting at least a marginal rebound for one or two months so they can "live" to fight another day). This also explains the reverse inquiry nature of most recent REIT equity raises: these are not voluntary institutional and retail investors channeling interest to the Merrill and Goldman syndicate desks: it is, in fact, the opposite. On the day before an equity raise, the head of equity syndication at Merrill will call fund XYZ and ask them, essentially, if they would be willing to throw some good money after bad. The potential side effect of a forced short squeeze or, even more sinister, the feedback loop of leveraged ETFs getting thrown into the equation as a price trajectory perpetuating mechanism, is hopefully not discussed, although after last week's cloak and dagger disclosure about Bernanke and Paulson illegally strongarming Ken Lewis, nothing should surprise readers anymore.

In my search for candidates of this possible reverse inquiry mechanism, I stumbled upon some interesting clues, which have lead me to reexamine some old Zero Hedge favorite names. I present some observations.

A few days ago, Cohen & Steers (CNS), possibly the largest publicly-traded, long-biased REIT-focused asset manager reported its First Quarter results. As expected, the numbers were horrendous, underperforming the S&P500 by a vast margin. Of course, Zero Hedge readers should not be surprised by this performance: virtually the entire CNS portfolio is comprised of long REIT positions, which in Q1 lost over 30% of their value (in addition to a massive drubbing in all of 2008). It is thus not surprising that CNS reported that it saw major declines in Assets Under Management, which dropped to $11.6 billion at March 31, 2009, a 23.2% decline from from $15.1 billion at December 31, 2008, and a 60% decline from the $28.6 billion in AUM at March 31, 2008! What is very interesting is that of the $3.5 billion reduction in AUM, a majority, or $3.4 billion, was due to asset depreciation, and only $76 million was due to net capital redemptions, a major moderation from the $2.9 billion in redemptions year over year.

What is even more interesting, is that Cohen and Steer's institutional separate accounts (or managed accounts) stood at $5.6 billion, or nearly half of CNS's total AUM. And following up on this, and most interestingly, somehow Cohen and Steers managed to convince institutions to invest $395 million in its managed accounts, despite the decline in AUM for institutional separate accounts from $6.3 billion to $5.2 billion, before new capital inflows, an 18% decline. That is some truly phenomenal marketing PR. Just who these institutions are that have a (vested) interest in providing fresh capital to a REIT manager which demonstrates a market underperforming loss in AUM across the managed account class is truly very interesting and likely source of further much more focused investigation.

The last is an open question I will return to shortly, but in the meantime, it makes sense to present Cohen & Steers March 31 investment commentary for the Q1 period. Most notable here is CNS's disclosure that without it, none of the new equity raises in March (and likely April) would have been completed.

Cohen & Steers was instrumental in these capital raisings, and was a cornerstone investor in the offerings. We believe these transactions have demonstrated to the market that high-quality REITs have access to capital and can reduce their leverage, as needed. In our view, these companies, along with others that have strong balance sheets, will weather this recession and credit cycle and remain industry leaders.

Without the inflow of $395 million in "institutional separate account"capital, CNS would likely have been unable not only to be a "cornerstone investor", but to participate at all in any of these financings, which due to their reverse inquiry nature, would thus likely never have occurred in the first place as a seed investor is always critical in order to generate additional reverse inquiry interest. The first question a syndication desk gets when solicitation reverse inquiry interest is: "Who else is participating?" Absent a clear cut answer, the offering dies right then and there. This makes the question of just where these managed account inflows came from, all the more interesting.

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The innocent conclusion is that Mr Robert Steers must really believe in dollar cost averaging. Alternatively, the fact that Merrill Lynch was the lead underwriter of virtually every single Cohen and Steers closed-end fund may potentially raise a few question marks (for our readers' convenience we have compiled some of the relevant Cohen & Steers prospectuses here - please note the lead underwriter in every single instance: Global Income Builder, Dividend Majors Fund, Quality Income Realty Fund, REIT and Preferred Income Fund, Premium Income Realty Fund, Total Return Realty Fund, Closed End Opportunity Fund, and the list goes on). The not so innocent conclusion is that Merrill, as Zero Hedge discussed previously, which would be very happy offload its credit exposure (via Bank Of America's key role as lead and syndication manager on the bulk of REITs secured credit facilities), with the assistance of its equity analysts, who would upgrade the respective REITs from Sell to Neutral or Buy ratings as soon as the offering was priced, may have had an ulterior motive to work with CNS, and facilitate their new capital generation, in order for them to serve as lead investors on all of the equity offerings (dilutions) that Merrill was lead underwriter on. An even more unwholesome pattern thus emerges: Merrill sells, CNS buys (using closed end funds which Merrill underwrote or new capital from "who knows where"), Merrill upgrades, REIT pays off Merrill secured loan, CNS marks profit on position as short squeeze in REIT stock is generated, and new investors put money into CNS after seeing "phenomenal" monthly or quarterly returns.

Quite interesting for the conspiracy minded.

But that's not all. On its April 23, Q1 conference call, Cohen and Steers had some interesting observations about the state of the REIT "deleveraging". CNS President Joseph Harvey had this to say about the company's willingness to throw tons of new capital at the REITs in the recent equitization wave:

"Our approach to these recapitalizations are to provide equity to these companies, to provide solutions to their balance sheet issues. Of course, you can't create 100% uncertainty. However, we believe that the equity that we and others are providing will be sufficient to get these companies through the year 2012. So we think that's a very long time horizon. We're confident that – by that time, the equity markets, other capital markets, will have improved. So we're extremely excited about these opportunities and the position of these companies once we execute these transactions."

Looks like Mr. Harvey has not focused a lot on threat of REIT refinancings. But who cares about 3 years down the line, when in the meantime you can bump up profits on a short squeeze and generate some additional investor interest in your fund (thus maintaining your biweekly paycheck).

Some more insightful disclosure from Mr. Harvey, who responds to Merrill analyst Cynthia Mayer's question of how far down the REIT equitization process the market is.

"In rough numbers – and again, this is a moving target depending on how the capital markets open up, but to delever the US REIT sector to levels that we think are sustainable, let's say it takes 40 to $50 billion of equity capital. In one-months' time, there has been about $10 billion that's been raised. So that's a pretty significant bite out of the apple. Now, of course, that's just the US. We think there is other opportunity outside of the US.

Let me also point out that if we have seen the lows in these stocks and we're gaining confidence that that's the fact, as we think through the next return cycle for REITs, I'd break it down into three phases. Phase one is the re-equitisation of the sector. There is going to be a phase two that we believe will be very dynamic and exciting from an investment perspective, and that phase is for our universe of companies to acquire assets from the private market who has their own leverage issues. And we know because of what the debt maturity schedule looks like in the real estate industry and what the capital structure of those assets is that there will be fore-selling. And based on our experience through the early to mid-90s, we believe that the public market will provide the capital to our universe of companies to take advantage of those opportunities to acquire from distressed sellers.

Zero Hedge would beg to differ that there is anything even remotely comparable between the current situation in the CRE market and that in the early 1990's. But that is irrelevant: Mr. Harvey essentially is hoping that there will be a greater fool available, to whom CNS can offload its REIT securities, ahead of what CNS believes will be a flouring period for commercial real estate beginning in 2012, which of course is contrary to what Zero Hedge and more and more market participants believe will happen, namely the refi crunch in 2012, which will expose CRE for the massive sham it truly is.

Amusingly, subsequent the call, Cynthia Mayer, who likely is not with the program, reiterates her Sell rating on Cohen & Steers.



Another last amusing point from the CRE conference call, is Harvey's response to UBS analyst Phil Wilhelm, who asks the logical question of what exactly is it that makes CNS comfortable that the REIT market has seen the bottom, and what themes is the company seeing that can support this claim. The answer leaves much to be desired:

We're really not comfortable discussing our short-term thinking on market movements and why. That's what we get paid to do for our clients. So, I'm not going to answer your question as to what gives us confidence as to why REITs have bottomed. We feel pretty confident in that, but we'll let you draw your own conclusions on that.

As I mentioned earlier, there is probably $30 billion US in equity that still needs to be raised over a couple of year period. So that's still a lot of capital relative beside the universe, and there is over a 100 REITs, so I'd say 15 of them have raised equity already. So there is going to be a lot of activity. We believe that the share prices have overshot on the downside to discount this financial risk. So as these balance sheet issues are solved, I know the stocks have performed and that's what has attracted investors to the area. So there is no assurance that this is going to continue if share prices rise to the point where the stocks reflect the opportunity to recap, it's going to get tougher for these deals to be done. But we think as long as they're done right and we've got a very specific formula for how they should be done, the market will – there is lot of capital out there that can absorb this equity.

May Zero Hedge ask just what this specific formula for how deals get done is? Could it involve managed accounts, a short squeeze, and Merrill Lynch in some capacity? Inquiring minds want to know. Because, despite CNS' stern promise that things are getting better, I for one would be happy to challenge anyone from CNS's management team or their portfolio managers one on one or one on many, that things, in fact, are not getting better, and once the refi cliff hits, thing will likely get a whole lot worse. I also have the numbers to back my assertions. One thing is for sure: Harvey is likely correct that there is another $30 billion or so in new equity raises down the pipeline. Zero Hedge would speculate that Merill, which is likely to be an underwriter on the bulk of these, will easily generate $1.5 billion in equity underwriting fees (the customary 5%), and CNS will likely be a happy "cornerstone investor" as more and more short squeezes are sprung. Technicals will dominate as fundamentals tell each and every investor will half a brain to run for the hills.

But then again, we live in a market where fundamental don't matter, and there is much more going on behind the scenes than is being let on. And for the most convincing example of the later, I bring your attention to the April 24 Q1 earnings call by Developers Diversified Realty Corp, one of the many beneficiaries of the REIT short squeeze. I bring your attention to the very end of the Q&A from the conference call, where EVP and CIO David Oakes chimes with the following cryptic disclosure:

"And I would like to add – to chime in here too, Jim, that I was at the real estate roundtable meeting the other day and we spent a few hours with Ben Bernanke, and he's pretty confident that we're going to see this help program for CMBS up and running within a few weeks; and very helpful that that's going to start to create a little bit of liquidity in the CMBS market, and we're in the queue with one of the major investment banks to do a significant self-financing when that becomes available."

Aside from this being a blatant attempt at Reg FD breach, would this bank potentially be Merrill Lynch one would wonder? But more relevantly, just what is it that Ben Bernanke is promising managers of very troubled REIT companies such as DDR? Perhaps, once done investigating Merrill-gate and Ken Lewis, and whether or not Mr. Bernanke was instrumental in putting that deal together, direct threats to Mr. Lewis' career notwithstanding, the new York State Attorney General can take a look at just how widespread taxpayer fund misappropriation is at the Federal Reserve level in order to buy a few quarters of breathing room for doomed REITs at the expense of fundamentally sound investment analysis. Sphere: Related Content

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ProLogis European Properties Downgraded By Moody's With Negative Outlook

Prologis European Properties (PEPR), a fund investing in Prologis developments, just got the Moody's axe, which cut its rating from Baa2 to Baa3, with a negative outlook.

"The ratings downgrade reflects PEPR's poorer-than-expected financial metrics and heightened liquidity risk profile," explains Lynn Valkenaar, a Vice President-Senior Analyst in Moody's Corporate Finance Group. "The downgrade also relates to PEPR's heightened liquidity risk profile due to (1) the large refinancing requirement of EUR1.3 billion over the course of 2010, and (2) the limited headroom under its banking covenants," says Ms. Valkenaar. "Management has taken several positive steps to manage its overall liquidity and funding profile, but progress has been slower than Moody's expected. Therefore, Moody's is concerned about execution risk in light of the continuing difficult credit market conditions."

As the CRE picture is getting worse by the moment, PEPR's stay at this bottom-most investment grade rung will likely not be too lengthy, as the company promptly continues on its downward trajectory.

Btw, this is a correction: ProLogis was kind enough to point out the difference between PEPR (rated Baa3) and PLD (Sr Unsecured rating Baa2), and that PEPR has very little to do with PLD, the development company. We were way ahead of ourselves to assume that PLD is in the same shape as PEPR. Sphere: Related Content

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REIT Dominoes Wobbling: DDR Preferred Cut To Junk

Moody's shredder is on max today. The rating agency cut Developers Diversified Realty's unsecured rating to Baa3, the lowest investment grade rating, and its preferred stock rating to Ba1, or junk, and has kept the company on negative outlook. Expect a comparable cut from S&P any minute which last week put virtually the entire REIT space on downgrade watch.

The jist of Moody's report:

The negative outlook reflects the deterioration of DDR's results over the past year due to a difficult operating environment and a development pipeline with a sizable amount of leasing required in a very challenging economic environment. DDR also has exposure to several tenant bankruptcies/store closings, three of which are in the REIT's top ten. Moody's expects earnings and credit metrics will remain pressured over the near term as market conditions for retailers continue to deteriorate. Moody's does note that management is making progress and has clearly defined deleveraging and refinancing goals.

Although DDR has substantially scaled back its developments, and mitigated most of the pre-leasing exposure, Moody's concludes that such near term improvements will have a modest effect on its credit profile. Moody's expects the challenging operating and credit environment will pressure retailers and will continue to increase debt refinancing costs. DDR currently has exposure to manageable bankrupt and troubled retailers such as Mervyns, Circuit City and Rite Aid. In addition, asset sales will be challenged as cap rates are expected to continue to rise and acquisition financing remains scarce.

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Simon Property Next REIT To PIK Dividends

As we discussed previously, the trend of PIKing dividends continues, with Simon Property Group announcing earlier it would pay out its $0.90 quarterly dividend in the form of 10% cash and 90% in kind. The largest mall and shopping center operator is aggressively conserving cash in a scary commercial-mortgage backed environment. While the press release boasts the company's "strong balance sheet" and credit rating (A-/A3), we would not bet on the latter staying there too long: as we mused recently, S&P's seems hell bent on catching up for a 30 year drunken, lagging stupor, by downgrading pretty much anything and everything that moves. 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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