Thanks for the link. I found it very interesting and informative.
Here is a Dow-Jones News-Wire article that might interest you.
PaineWebber Urges Asset Sales, Buybacks To Boost REITs
By Janet Morrissey
NEW YORK (Dow Jones)--In an about-face, PaineWebber Inc. analyst Jonathan Litt is now encouraging real estate investment
trusts to do share buybacks as a way to boost their sluggish stock prices.
Over the past year, Litt had opposed buybacks because he believed the REIT slump would pass and that companies would wind
up spending precious capital that they could not retrieve, thereby boosting their debt.
"But as the slump continues and as the discount to net asset value gets greater, we revisited the topic," said Litt, who estimates
REITs are currently trading at about a 17% discount to NAV.
Litt, citing an academic research report in the November issue of the Journal of Finance, said buyback programs in lower-growth
companies, such as REITs, helped to boost both the operating and stock performances of the companies. Those getting the
biggest lift were those that could do the buybacks without increasing their debt.
As a result, Litt is suggesting that companies sell non-core, weaker, or slower-growing assets to raise cash to repay debt and
repurchase stock.
"We've seen a number of REITs announce stock buyback programs by simply leveraging up the balance sheet only to later issue
more expensive equity in the form of convertible preferred, straight preferred or simply leveraging up and reducing their ability
to grow off their balance sheet," he said, "And that's the wrong strategy."
By selling off weaker assets, he said, the company's remaining portfolio will have a higher growth rate going forward and the
market should be willing to pay a higher multiple for it.
The analyst said the concept may be difficult for REIT managers who are more interested in building an empire than reducing the
size of their portfolio. But he believes many executives, whose compensation is based on share price appreciation and funds
from operations growth, may be open to this concept.
"If this is the way they can get more compensation, I think they'll seriously start looking at it," he said.
Litt said companies that stand to gain most from buybacks are those that are trading at more than a 15% discount to NAV.
But he doesn't believe companies with big development pipelines should do buybacks.
"We'd prefer development pipelines be shut down because we think most of them can get a better return by buying the stock than
finishing their pipeline," he said. For those that don't halt their development pipelines, he recommends against buying back
shares because this would shrink the equity portion of their balance sheets.
Among the companies trading at deep discounts to NAV are CarrAmerica Realty Corp. (CRE), which is trading at a 35% discount to NAV, Meditrust Corp. (MT) at a 34% discount, Host Marriott Corp. (HMT) at a 32% discount, and Macerich Co.
(MAC) at a 28% discount, Litt said. |
