9 REITs That Had to be Destroyed in Order to be Saved
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 9 REIT stock 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 REIT 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:
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 (SPG is currently paying dividends in stock, click here for a complete list of REITs paying 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. Check out Mid-America Apartments (MAA), which will definitely be the best performing Apartment REIT for 2009. Equity Residential (EQR) is another Apartment REIT that reported solid Q1 earnings. The Fed's plunge into CMBS via TALF is causing lots of intrigue in the Mortgage REIT world, particularly with Dynex (DX) which invests in both agency and non-agency RMBS and CMBS.
Disclosures: None at the time of publication
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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 REIT 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 | Increase In Shares Outstanding | Dividend Cut | News |
| 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 (SPG is currently paying dividends in stock, click here for a complete list of REITs paying 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. Check out Mid-America Apartments (MAA), which will definitely be the best performing Apartment REIT for 2009. Equity Residential (EQR) is another Apartment REIT that reported solid Q1 earnings. The Fed's plunge into CMBS via TALF is causing lots of intrigue in the Mortgage REIT world, particularly with Dynex (DX) which invests in both agency and non-agency RMBS and CMBS.
Disclosures: None at the time of publication
commercial real estate
reit investments
reit stocks
reits
reit news
Labels: BDN, CPT, CSA, DRE, DX, KRC, PLD, REG, REIT Dividends, WRI
posted by REIT Wrecks at
12:18 PM
22 Comments:
As a fellow REIT vulture I LOVE this blog - thanks for doing it!!
One question - would you put HPT's offering last week in this group to make it an even Top (Bottom) 10? The shares outstanding increase is in the low range and the dividend was discontinued. Just curious given the similarities the deal shared with the ones you mentioned why it wasn't mentioned.
Ha! Thanks, the whole REIT Wrecks project, which is what it has become, has really been a lot of fun.
The reason I didn't include HPT in this post is that the stock offering was not directly causal. HPT's div was cut in early April, but their stock offering closed in mid-June. The above 9 sold stock first, thank you very much, and then cut their dividends.
In reality though, I think it is a perfect 10 because I am pretty sure I am missing one - just can't remember which one.
Others that have "re-equitized" but not on this list because dividends have not been cut are CLI and AMB (and SPG, which is in the text).
Great heads up on HPT though! They still say they will report "significant" earnings in 2009 and will therefore pay a divvy in Q4, so I wouldn't put them on the above list quite yet.
Feel free to feed the suggestion box - either here or by email (dividendstream at yahoo dot com) -and thanks for the comment!
For my reference, as well as anyone playing along at home, as of 6/20 VNO and BXP have also closed equity recaps.
From the rest of the Ben Tre wikipedia article:
The incident was taped and shown on the news. Peter Arnett said, "So you had to destroy the village in order to save it?" The major said, "Let's get down from here. We're drawing fire."
Despite being attributed with it, the Major never said it. Arnett did.
I do love the site, though, just hate to see a good man blamed. Arnett claimed to have the quote in his note pad.
Anon, I admit - this was a bit of a trick. I didn't actually say that he said it, just that he "allowed" it. It's cheap, I know, but I do put a lot of thought into how I write this stuff.
I am a history student though (Karnow's history and John Paul Vann's Bright Shining Lie are two of my favorites), so I'm glad you took the time to clarify it. I figured it was only a matter of time!
Cheers, RW
Where is the suggestion box? I'ld love to suggest an article about the recent wave of reremics coming out in front of S&P's planned CMBS downgrades, but I don't find the link. Due to fear of anonymous, I wouldn't write the article myself.
Crabs of steel, if you please, I like to think of myself as a forward thinker. The link is here: (circa July 2008) Makeovers Coming Soon to Mortgage REITs. It could use an update, but it's more or less still accurate, especially the last paragraph, which was like shooting ducks in a barrel.
By the way, I attended an investor/issuer conference (not NAREIT) a few weeks ago on REITs and other "growth stocks", and there was not one Mortgage REIT management team that didn't mention re-remics.
Not sure what Anon was doing back in July of 2008, maybe he was happily stuffing himself full of AAA bonds! But seriously, who cares about the ratings at this point anyway? The big three have been hopelessly behind throughout and I can't imagine them regaining their credibility in my lifetime. Cash flow is king, not ratings.
BTW, the anon that crabs of steel (not simply "crabs", if you please) and I are referring to is different anon than the anon who commented above.
Just trying to help, so post freely crabs
(sorry, it will always be crabs to me, crabs of steel is too formal).
However I may share my thoughts if I have any.
I did load up on CMBS, and not just AAA. However, I did it in Q4 2008 and some in Q1 2009. In CMBS, I am up 50%. I dont listen to rating agencies or the market, as they both make errors, particularly in once in a lifetime events such as these.
anon
Anon, crabs of steel (if you please), do either of you guys know where retail investors can buy CMBS? I think that firm in Austin (Alliant, Alliance??) will handle retail accounts, but they want a $1 million minimum. I get a bunch of emails and questions about that, but I've never had any good answers. Any thoughts worthy of posting would be appreciated!
Anon, congrats on those trades, it must have been tough in March!
I don't think REITs are done raising capital -- not by a long shot. Asset deflation there is just getting started. And rising unemployment (Where will the jobs come from?) will further dent cash flow. You might want to consider all of that when thinking about investing in them.
And if I had profits on any CMBS trades -- however you went about that -- I would certainly book them.
Market take-up of stock offerings by REITs proves nothing other than the 'greater fool' hypothesis. Perhaps also that as usual some people have trouble correcting identifying a value trap.
RW,
Anyone with a brokerage account can technically buy CMBS (excluding the private placements); the question is rather whether you can see what's on offer. All the sell side banks have offering sheets with bonds they have for sale but they're typically not sent out to retail investors because no one wants the annoying phone calls from Grandma.
If you have an account with Fidelity, Pimco, Amherst, Putnam, etc. they can probably put you in touch with some. Fair warning is that for odd-lot trades (i.e. <1MM), they will rip your eyes out because CMBS is not a retail product.
crabs
p.s. as for the recent wave of reremics, Fitch and Moodys want to make sure they are going out of business by reliving their blunders in rating CDOs for anyone who missed it first time around
eh
Thx for the advice, I will take it into consideration on my next trades.
RW, retail trades in CMBS arent hard to execute. Its just hard to find a place that is in the flow and can show you some. And then when they show you some, do you know what you are looking at and is it a decent price? Lastly, when you buy a tiny piece of a bond, your readers should expect to hold to maturity, otherwise if they sell back later they will not get a price close to the true value of the bond.
Best way to buy is if you know people who are on desks, but that is unlikely to be the case for your readers who asked, otherwise they wouldnt ask you for help.
Maybe if you open an acct with BofA you could see their offerings, but I would ask before opening the acct. Or maybe Jefferies, or Amherst (if they provide retail acct services).
Easiest way is people could buy a bond fund like PCM that is mostly CMBS. Its as easy as buying any stock. Ticker is "PCM". It has a mixed bag of securities in it.
to add to the above excellent post by anon, in order to know what you are looking at usually requires some fairly expensive subscription to Bloomberg, Trepp or Intex. Also, it's possible to short indexes of 2006-8 vintage CMBS via CMBX credit default swaps (see WWW.Markit.com) but again it's not meant for retail investors because of size issues.
Thanks Crabs and Anon. I definitely understand the difficulty that a retail investor would have in separating the quality of one issue from another, or in relying on some guy they don't know to trade for them (BTW, Jeffries is a great suggestion - and Amherst is the shop I was thinking of in the original Q)
I can make some generalizations about underwriter track records, but I can't see and don't have access to current default rates on a deal-by-deal basis. Presumably a lot of that is priced in, but big defaults (Riverton, Dos Lagos) have tended to cause the bonds to gap out on the day the default is announced, so I don't think one can make that generalization. One good equity analyst I know actually gets in his car, drives all over hell's creation and takes pictures. When was the last time an analyst at Moodys left 99 Church for something other than the five o'clock whistle?
However, what I can see and analyze are I/O provisions, actual DSCRs, underwritten LTVs and so forth, and I get out and actually touch the dirt pretty often....so taking it one step further, if an investor were to look at some of these deals, which 5 issues would be worth spending the time to analyze? (aside from that giant Goldman deal.) Conversely, which 5 issues would be better off in the bin? If it's of any merit, I may write a post on the goods, so hold your thoughts if your compliance guys are a worry.
As for eh, I can't tell exactly, but I think he may be Scottish.
RW,
I only look at the 100+ deals that are in the CMBX indexes, but the whole question of what's good and what's bad is still quite open. In these deals, the percentage of specially serviced loans ranges from 0 to 22% (and that's for an 08 deal no less, when underwriting standards were supposedly "better"). The average deal has 5% in special and what look to be the bad boys more like 10-12%. These percentages are increasing though, as each month sees more top-ten loans (where each loan is a few percent of the overall pool) get transferred. Anyone with Intex can see who the worst originators were.
I definitely look at how much of a pool is interest-only; most were loans made to spec borrowers. By 2007, term I/O loans were the norm, accounting for well over 80% of issuance. Particularly bad are I/O pro-forma loans on multifamily portfolios. The properties in one Bethany loan were just appraised down 63%.
Since our good buddy anon has made so much $$$ trading CMBS and I can not see how that was possible unless he bought CMBX protection big time, he/she has more to add.
I dont think a retail account firm will be doing synthetic trades in CMBX for anyone. If you hear of a place doing this, let me know.
CMBS bonds are trading at much higher prices today than they were in Q4 2008 for example. I was buying certain bonds at 35 cents on the dollar that are now worth 50. Or other bonds that were 50 cents on the dollar now worth 80. Plus I collect a nice coupon payment each month.
I noticed PCM is up quite a bit as well over that time frame, and it pays a nice healthy coupon as well.
I dont have any general recommendations, the bonds are very deal, tranche and loan specific. But the market generally has already priced bonds according to their percieved credit risk. So very clean deals already cost much more than a poor deal. If a poor deal is cheap enough, I am a buyer of it vs a clean deal, and thats exactly what the market is doing as well. It also depends on how much risk you are willing to take on.
To be long CMBS is gutsy. As I am sure you know, S&P pulled the trigger and watchlisted 1,500+ CMBS for downgrade including "super-senior" AAAs. This can't be very positive for bond prices.
S&P's oppinion is irrelevent. They have done a good job of making themselves irrelevent.
S&Ps ratings are irrelevant. Butt mass downgrades would provoke the forced sale of every former AAA held by pension funds and insurance companies. That can not be good for the market.
KIM recently sold even more stock. Earnings come out soon; it will be interesting to see if they stand by the dividend increase they announced earlier.
Hi eh, good heads up on KIM. I am going to tune into that conference call; should be an interesting one! They were 1031-ing themselves like crazy in the Southwest back in 2006. Those trades have definitely gone pear shaped, but if the market will loosen up a bit (in terms of constipated sellers), a REIT like Kimco might have a shot at picking up some decent retail assets. It will be interesting to hear what they say about that. As usual, none of it can be trusted, so take it all with a grain of salt (this is your forte, I know, the comment is for anyone who thinks I own KIM or am thinking of buying it; I do not and am not).
Cheers, REIT Wrecks
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