the worm has turned

Market Rally Feeds Optimism at Annual REIT Confab
Investment Trusts Now Viewed as Part of the Solution Rather Than Part of the Problem. And Analysts Are Curbing Their Enthusiasm

November 18, 2009

Participants in last week's annual NAREIT convention in Phoenix described the mood in terms ranging from hopeful to full-on ebullience -- adjectives not often used for the past two years with respect to most gatherings of commercial real estate professionals.

"No sour faces. No sulking. We even saw a CFO dance in the lobby," writes Citigroup global analyst Michael Bilerman in his annual list of takeaways from the National Association of Real Estate Investment Trusts convention. The conference drew about 1,000 attendees Nov. 11-13 to the JW Marriott Desert Ridge.

"We must have heard 'what a difference a year makes' and 'cautiously optimistic' 100 times over multiple property tours, dinners, management meetings and throughout the halls."

It's a far cry from last year's convention in San Diego, when a late-fall rainstorm set the tone as glum executives watched the market plunge two months after the collapse of Lehman Bros. and worried about the future - not only of the real estate industry, but of the entire global economy -- as the credit crunch, mortgage meltdown and economic downturn turned into the worst financial crisis since the Great Depression.

REIT share prices plunged along with the broader market in the first two months of 2009, with the FTSE NAREIT All REIT Index finally hitting an 18-year low on March 6. Since then, however, publicly traded REITs have rocketed more than 89% by cutting expenses, de-leveraging and raising a welcome source of capital in the market through some $25 billion in 90 equity stock offerings. In affect, several observers said, public CRE companies have gone from being part of commercial real estate's problem to part of its solution.

"More equity has been raised this year than in any other full year in REIT history except 1997," and the tide of offerings continues to rise, said Debra Cafaro, chairman, president and CEO of Ventas, Inc. and NAREIT chairman. The first buyers of equity were dedicated real estate investment trust investors, "but they were closely followed by a range of portfolio managers and individual investors who recognized the extraordinary value opportunity."

At the beginning of March, the average debt ratio of REITs was 66%, and by the end of October, it had dropped to 48%. The transparency of the flood of equity into the trusts and ensuing deleveraging helped boost investor confidence in the sector, which also has helped unlock unsecured debt markets, providing another $9 billion boost in unsecured debt so far in 2010, the bulk of it since August, at increasingly favorable terms, Cafaro noted.

Althought REIT executives were noticeably optimistic, no one believes REITs are out of the woods yet. REIT shares are still 49% below their February 2007 peak. Some REITs are just too leveraged and facing too much bad debt to be helped by equity raises. And hopes that March 6 was the trough for REITs cannot be extended to the broader commercial real estate market, where average direct property values are down as much as 40% and falling, debt maturities continue to come due and the secured debt market remains dysfunctional.

"Winners and losers will be determined in large part on their ability to access capital," Cafaro said. "REITs have resoundingly demonstrated that ability. That, plus cash-flowing assets and relatively low debt burdens positions REITs as the clear winners as the real estate cycle plays out as high unemployment and a slow recovery continue to pressure property fundamentals."

"Certainly the equity markets will show customary fits and starts. Nonetheless, we believe REITs have turned the critical corner in 2009."