9 REITs That Had to Be Destroyed in Order to Survive

In 1968 at the height, so to speak, of the Vietnam War, U.S. Air Force Major Chet Brown was fresh out of ideas and common sense. Tired, frustrated and on the wrong end of a microphone after a battle for the provincial capital of Ben Tre, he famously allowed that it had become necessary to destroy the town in order to save it. Such is the logic surrounding a spate of REIT equity offerings in the first half of 2009.

Undercapitalized and over-leveraged, many REITs had no choice but to enter into dilutive transactions in order to survive. But like Ben Tre, these 9 REITs have been flattened by massively dilutive equity offerings, and nobody can predict when they will be able to meaningfully grow their dividends again.

Most of these "re-equitizations" were completed overnight within hours of being announced, which is no wonder as they were priced at a huge discount (over 10%) to the previous day's close. Many of these overnight REIT equity offerings more than doubled the amount of shares outstanding.

The decision to sell massive amounts of discounted stock at a time when rents are declining across the board is tantamount to destroying these REITs. Indeed, dividends were cut almost immediately after these offerings closed. While it's unclear how the new shareholders felt about this little welcoming gift, what is clear is that these stock deals were hugely dilutive, and that will make it extremely difficult to show any meaningful dividend growth for at least the next several years.

NINE NOT SO GOOD REIT DEALS

REIT NAME	SHARES OUTSTANDING	DIVIDEND CUT	SA QUOTE
Brandywine Realty Trust	+34%	-67%	BDN
Cogdell Spencer	+74%	-51%	CSA
Camden Living	+13%	-36%	CPT
Duke Realty	+40%	-32%	DRE
Kilroy Realty	+27%	-40%	KRC
Kimco Realty	+39%	-86%	KIM
Prologis	+65%	-40%	PLD
Regency Centers	+14%	-36%	REG
Weingarten Realty	+30%	-52%	WRI

There are many good reasons to invest in REITs right now. REITs typically lead property markets into and out of recessions, and these successful equity offerings indicate that the market is anticipating a recovery. Nevertheless, these 9 REITs are best avoided in favor of others that have not had to conduct such radical recapitalizations.

Suggestions? The adventurous could take a look at Simon Property Group (SPG). SPG also just closed a large equity offering, but dividends were not cut and management said recently that SPG would resume paying all cash dividends in early 2010 (Note: SPG is currently paying its dividends in stock.) SPG owns a portfolio quality assets in good locations, and they have cash to pick up more.

Apartment REITs will benefit from tighter single family lending standards, very favorable long-term demographic trends, and a precipitous drop in the construction of new apartment stock. Mid-America Apartments (MAA) has a portfolio of good assets in stable markets, and reported solid Q1 earnings along with Equity Residential (EQR). Meanwhile, certain Healthcare REITs could benefit from Obama's healthcare reform efforts, and the Fed's plunge into CMBS via TALF is causing lots of intrigue in Mortgage REITs.

Disclosure: None at the time of publication

Comments

[TB1000:]

Weak analysis. It would be more beneficial to show their current dividend yields and where their stocks are trading relative to NAV. I'm pretty confident that after that quick analysis you'll find that several of those stocks are attractive buys right now.

Jun 24 11:16 AM

[REIT Wrecks:]

TB1000 - Maybe. However, aside from that certain declarative adjective in the beginning, you make a fair point and I'll publish a follow up sometime next week.

Cheers, REIT Wrecks

Jun 25 01:38 AM

[Emerald:]

Better run apartment REIT's who have refinanced near term debt maturities are a great investment now, such as EQR and AVB. I would stay away from retail, hotels and office as these markets will continue to weaken thru 2010.

Jun 28 12:10 PM