Another 30% Dive is a Remote Possibility for REITs Sector With Insolvency Scare Dissipated Because of Equity That Has Been Raised, Experts Say
* On Tuesday July 28, 2009, 2:16 pm EDT
67 WALL STREET, New York - July 28, 2009 - The Wall Street Transcript has just published its report offering a timely review of the sector to serious investors and industry executives. This page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Real Estate Investment Trust Stock Picks - Strong Balance Sheets - Quality of Real Estate Assets - Current Economics Lodging Industry - Near-Term Debt Maturities - Insolvency Risk - Projected Economic Stress - Investment Opportunity - Real Estate Sector Strength - Vacancy Rates by Real Estate Sector - Declining Rental Rates - Growth Potential for Retail Real Estate - Positive Cash Flow Growth - Sustainable Dividends
Companies include: Grubb & Ellis (GBE), Grubb & Ellis AGA Realty Income Fund (GBEIX), Grubb & Ellis AGA US Realty Fund (GBEUX), Grubb & Ellis AGA International Fund (GBEWX), General Growth Properties (GGWPQ.PK), Simon Property Group (SPG), Vornado (VNO), Boston Properties (BXP), Essex (ESS), BRE Properties (BRE), AvalonBay (AVB), Associated Estates (AEC), Macerich (MAC), Acadia (AKR), Federal Realty (FRT), AMB Property Corp. (AMB), ProLogis (PLD), EastGroup (EGP), Public Storage (PSA)
In the following brief excerpt from just one of the 10 detailed interviews in the 44 page report, industry expert Jay P. Leupp, President and CEO of Grubb & Ellis Alesco Global Advisors, discusses the outlook for the REIT sector and picks high return stocks with sustainable dividends for investors in this industry.
TWST: From a geographic standpoint, a little more than 50% of the international fund was concentrated in Japan, Singapore and Hong Kong as of the end of the first quarter. Do you expect to continue that concentration?
Mr. Leupp: The concentrations change during the quarter, and they're published quarterly, so we don't comment specifically about what we are doing intra-quarter. But I can tell you that it's pretty safe to conclude that we will have a bias toward the faster-growing economies, and we see a lot of that growth happening in Asia - in both Singapore and also in China, less so in Japan. But the one thing you have in Japan is not only a very, very strong economy, but a very stable economy, a stable population and very high asset quality. One of the differences that we like to talk about is that we not only visit companies and walk assets in the US, but we do it internationally, too. There are only 10 to 12 global real estate fund managers who manage public funds that invest in real estate globally. We're one of them, and one of the differences we have is either I visit the countries or I send members of my team to these markets to both meet with companies as well as to walk individual assets. Although Japan arguably is not a growth economy, it's an economy that has an extremely strong and stable government and economy, and also has extremely high asset quality; whether it's office or industrial buildings, these are buildings that were built to last 100 years, and they are extremely well-maintained. The one area of Japan that could arguably be a growth area is that we view Japan as being relatively under-retailed, and so companies that are expanding their retail portfolios in Japan are ones that we like at the moment as well. I think it would be safe to say that we would maintain a bias toward Asia given that that's where we see some of the strongest and additionally some of the more stable growth internationally. Eventually, I think we will increase our positions in Latin America, but that's riskier territory from an investment standpoint, so we've just been more careful there.
TWST: After quite a plunge in returns, many REITs did make a fairly sizeable comeback this spring. Do you think the REIT market has hit its bottom, or is there reason to be concerned about more instability?
Mr. Leupp: We're investing right now under the assumption that we touched bottom in November, then once again in March. Undoubtedly, there has been a little mini-correction from the RMZ touching the 470, 480 mark back down to around 410 to 420 today. The intra-day low in early March of this year was 271. So we're up about 60% after pulling back almost 40% from January 1. We're still down on the year. The smaller percentages and bigger numbers make for bigger absolute numbers. But within that context, and one of the reasons for thinking that we probably won't revisit the early March lows, is that since the first week of March, the REIT sector has raised about $14 billion in capital. Part of the investor reasons for selling down the stocks in early March was broad-based fear of insolvency among the companies, that we would be seeing several more instances like General Growth Properties (GGWPQ.PK) - companies that had valuable assets but when the maturity date came around for their more recent maturing debt issues, they just didn't have the ability to refinance. They didn't have lenders willing to step up and refinance near-term maturities. But with the extra equity in the sector, we think that that assumption has changed, that most of the REITs have done a pretty good job over the last 12 to 15 months or so of making sure that their debt maturities over the next three years are pretty well-spoken for. The question of near-term debt maturities has gone from being either not asked on quarterly earnings conference calls or one of the last questions asked by investors and analysts to being the first question asked on every earnings conference call. It's been a micro focus of the industry for the last nine months at least, and we think that most of the fears of the sector not being able to finance itself going forward have dissipated and that we may, from a pricing standpoint, hang around here in this area for a while. But the thought of the sector taking a 30% dive back to its early March lows I think is more remote given the equity capital that's been raised. The insolvency scare has been dissipated because of the equity that's been raised. There may be some other fear that I'm not anticipating, but fear of enterprise risk or insolvency risk really is out of the equation now.
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