charliezap

Commercial Real Estate Time Bomb Ticking for REITs

I should also add that the looming problem is a bigger one for the banks than for conservatively-financed, publicly-traded REIT's, especially as some of the commercial mortgages are non-recourse. And many of these non-recourse notes were packages into CMO's, so who knows where they ended up!


On Apr 21 11:40 AM charliezap wrote:

> This is a quite useless and misleading article.
>
> 1. Not one of the five numeric columns in the tabulation is of any
> use in assessing whether to buy sell or hold any of the listed REIT's.
> In real estate, EPS and PE are not useful, as they are based on earnings
> after the deduction of accounting (book accounting, not even tax
> accounting). The non-cash accounting depreciation number has absolutely
> no relation to market appreciation of the building (or market depreciation
> as we have now). FFO (Funds From Operations) and FFO/Price are far
> more meaningful, as FFO shows the cash flow available to cover debt
> payments and to pay dividends (REIT's are normally required to pay
> dividends of at least 90% of taxable income in order to maintain
> a REIT's non-tax-paying status). The tabulation would have been
> helpful it it had columns for FFO/Share, FFO/Price and Debt Coverage
> Ratio.
>
> 2. The commercial mortgage refinancing "problem" lies more with
> privately held real estate, including private equity firms and pension
> funds, than with publicly traded REIT's, such as the stocks listed
> in the table. It was mostly private real estate that paid excessively
> high prices for buildings during the past few years while taking
> on short-term (2-4 year maturities) debt with variable rate interest.
> A few REIT's, such as General Growth (seekingalpha.com/symbo...),
> made major new acquisitions this way, but they are the exception
> rather than the rule. The article would have been useful if it had
> examined the debt structure and maturity schedules of the REIT's
> in the table.
>
> 3. After the S&L debacle, of the early 1990's, many privately
> held real estate operators went public as REIT's in order to raise
> capital and pay down debt. Most of these REIT's adopted conservative
> debt policies, keeping debt to less than 50% of total market capitalization
> (debt + equity). A few may have strayed from these guidelines, but,
> again, they are the exception rather than the rule.
>
> 4. Most REIT's are now priced well below NAV (Net Asset Vaue, based
> on the reduced market values of the properties. Before the October-November
> 2008 bust, most were priced in excess of inflated NAV's. Simon Properties
> (SPG, largest mall operator), for example, declined from a high price
> over $120 at the beginning of 2008, to near $22 recently. It has
> subsequently rallied to near $43, after refinancing some of its debt
> by issuing new stock and bonds. Citigroup has a Buy on SPG and estimates
> FFO for 2009 at $6.02 and put 12/31/08 NAV at $73

Commercial Real Estate Time Bomb Ticking for REITs

This is a quite useless and misleading article.

1. Not one of the five numeric columns in the tabulation is of any use in assessing whether to buy sell or hold any of the listed REIT's. In real estate, EPS and PE are not useful, as they are based on earnings after the deduction of accounting (book accounting, not even tax accounting). The non-cash accounting depreciation number has absolutely no relation to market appreciation of the building (or market depreciation as we have now). FFO (Funds From Operations) and FFO/Price are far more meaningful, as FFO shows the cash flow available to cover debt payments and to pay dividends (REIT's are normally required to pay dividends of at least 90% of taxable income in order to maintain a REIT's non-tax-paying status). The tabulation would have been helpful it it had columns for FFO/Share, FFO/Price and Debt Coverage Ratio.

2. The commercial mortgage refinancing "problem" lies more with privately held real estate, including private equity firms and pension funds, than with publicly traded REIT's, such as the stocks listed in the table. It was mostly private real estate that paid excessively high prices for buildings during the past few years while taking on short-term (2-4 year maturities) debt with variable rate interest. A few REIT's, such as General Growth (GGP), made major new acquisitions this way, but they are the exception rather than the rule. The article would have been useful if it had examined the debt structure and maturity schedules of the REIT's in the table.

3. After the S&L debacle, of the early 1990's, many privately held real estate operators went public as REIT's in order to raise capital and pay down debt. Most of these REIT's adopted conservative debt policies, keeping debt to less than 50% of total market capitalization (debt + equity). A few may have strayed from these guidelines, but, again, they are the exception rather than the rule.

4. Most REIT's are now priced well below NAV (Net Asset Vaue, based on the reduced market values of the properties. Before the October-November 2008 bust, most were priced in excess of inflated NAV's. Simon Properties (SPG, largest mall operator), for example, declined from a high price over $120 at the beginning of 2008, to near $22 recently. It has subsequently rallied to near $43, after refinancing some of its debt by issuing new stock and bonds. Citigroup has a Buy on SPG and estimates FFO for 2009 at $6.02 and put 12/31/08 NAV at $73