REITS: Why Would Anyone Think They're Attractive Now?

The greatest commercial real estate Kool Aid convention is currently in progress at the Waldorf-Astoria where NAREIT is holding its annual circlejerk week (oddly Zero Hedge was not invited), during which REITs try to convince other REITs how great the market is, how the GGP bankruptcy was the greatest thing since sliced bread, and how rents will (all facts to the contrary) continue to rise to infinity + 1 in perpetuity, as cap rates eventually become negative. Of course, if they really want to continue living in their humongous bubble, it's their right.

Now every now and then, someone utters something so dialectically stupid, that my ears start bleeding - it was only fitting that this year's "Kool Aid Statement of the Year" came from NAREIT itself.

Brad Case, vice president for research at NAREIT (who apparently lives in a cave and is locked into a 20 year lease agreement with exponentially accelerating rent increases), had this priceless gem of a statement:

Real estate investment trusts in the U.S. may raise about $582 billion by 2013 for acquisitions as competitors sell properties and values fall. Publicly traded REITs will probably accumulate about $728 billion, including debt, for purchases. REITs including Vornado Realty Trust and Simon Property Group Inc. raised $11.5 billion in offerings in April and May and that’s just the front edge of the iceberg. The process that’s taking place starting right now looks very much like the process that we saw starting in early 1991.

Where does one even begin? Of course, while serial upgrader and totally unconflicted equity underwriter and loan redeemer (and NAREIT conference sponsor, duh) Merrill/BofA (BAC) would love nothing more than to see REITs
raise 25x more than what they have issued in follow-ons already ($$$ signs dancing in the eyes of whoever is left in the REIT research department at Merrill), for that to be an even remote possibility, Commercial Real Estate funds (such as Cohen and Steers (CNS)) would all need to get nationalized, and Barack would have to announce that it is every man, woman and child's sworn duty to buy each and every share ever to be issued in perpetuity by such pristine and massively leveraged companies as Kimco (KIM) and Duke Realty (DRE).

For god's sake - if investors don't even feel like purchasing AAA-rated TALF CRE/CMBS paper at 12x leverage, who in their right mind would keep buying infinitely diluted equity offerings from trusts that don't even pay the mandatory cash distribution in cash anymore (why are REITs attractive again?). If investors are really so deluded and bullish, they should just go out and buy ghost mall X directly and skip the middleman completely. Oh yes, there are quite a few of these available compliments of the rising tide of upcoming bankruptcies in the space.

For those who want to "Just Say No" to the REIT Kool Aid, I continue presenting data exposing what a complete fraud any statement is that CRE is due for a rebound, let alone the garbage statement that REITs have yet to raise half a trillion in equity (I mean come on, there are only so many shorts ML can squeeze, right, right?). Today's installment comes courtesy of Massey Knackal, who has put together a great long-term analysis of Manhattan multifamily data. I would love to get Brad Case's insights on just what this chart implies for his venerable coverage universe. Some of the most relevant charts from the presentation (attached below, click to enlarge)

So while the jokers at the Waldorf Astoria bet the farm that CRE savior TALF
will bail them all out, things are getting uglier by the minute. We wish them all the best, especially in advance of the Fed adjusting the TALF inclusion criteria yet again. However, no matter how you spin it, unemployment, economic contraction and lower rents which are the new normal, will sooner or later catch up with them. There is only so much time that inflating your numbers will buy you. Sooner or later someone will have to pay their rent as well... Maybe that is the key issue that Case should have addressed instead of some waxing philosophical on some whimsical future page pulled out straight from the 2006 uber-leverage days.

Report from Massey Knackal

Comments

[user396040:]

I think some of the buying interest may be caused by all of the talk about pending hyperinflation. My own view is that REITS, like financial intermediaries, must be evaluated primarily on a balance sheet basis to determine whether they will survive in light of their debt obligations. My guess is that a REIT with a relatively low level of debt in comparison to cash flow may be a reasonable bet here but I have not really seen a satisfactory analysis of REIT debt levels and debt service coverage ratios. There are also mortgage REITs and again these have to be analyzed the way financials are analyzed (How solid is the balance sheet?). This is not an area I have gotten into. I bought some ISTAR bonds a while ago and I am about even while collecting an effective interest rate of over 20%. I think this is a sector where the interesting opportunities will initially be in the debt rather than the equity.

Jun 04 02:18 PM

[Dave Wrixon:]

It will all end in tears.

Jun 04 03:05 PM

[tobi:]

What is so exciting about REIT's ? Natural resource trusts offer a much better inflation play and the demand picture of their products looks still a lot rosier than that of commercial real estate to say the least....

Jun 04 04:30 PM

[SpokaneSlim:]

Yeah, but how do you really feel about REITs?

Jun 05 09:09 AM

[YoYoMama:]

Why do I like REITs? Well, they are on a tear right now. And most pay killer divies. So I'm getting capital appreciation AND getting paid in cash to hold these so-called "losers".

But make no mistake, I'll sell in a heartbeat once the euphoria is over...and have some extra cash as booty for my bravery.

Jun 05 10:22 AM

[carey_jim:]

Durden, you are funny.

Maybe there is a future in financial humor after all.

There was a cottage industry of laughing at the Nazis during the 1930's and the great Charlie Chaplin himself cashed in on it with a film called the Great Dictator. www.youtube.com/watch?...

It's even funny today, after we know what happened. It must have been hysterical then.

Jun 05 11:50 AM

[montyman:]

My most trustworthy source tells me REITS are indeed a buy. TD may be good at his style of analysis, but the real market does something else. Sorry, somebody had to say it.

Jun 05 04:01 PM