|
Biz Links Previous October July-Sept June May April March January Factoids June Part 2 June Part 1 May Part 2 May Part 1 Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index REIT Links CPN Globe St. ICSC Reis ReBuz RSR NaREIT NREI Property ICSC REIT Week NAIOP ShopCntrsToday ShopCntrWrld |
One of Alpine's stock favorites currently is Alexandria Real Estate Equities, which specializes in building laboratory office space for biotechnology and pharmaceutical companies. While the office market nationwide is showing vacancy rates of 15% or more, Alexandria's portfolio vacancy rate at the end of the third quarter was 4.8%, said Robert Gadsden, portfolio manager for the fund. The low vacancy rate is due to continued demand for research and development space from companies such as Merck. Gadsden expects Alexandria's funds from operations, which is net income plus depreciation and other adjustments, to rise 9% to 10% in 2003 from 2002. Another Alpine pick is iStar Financial, which provides financing solutions for commercial real estate. It recently has reduced its risk by moving away from "mezzanine" loans, which are subordinate to first mortgages, and toward first mortgages and "credit leases," in which it buys assets from a customer who wants to sell the assets and lease them back. Among the company's pluses are its range of loan products, which gives it a one-stop-shop advantage, and its dominance in the sector, which gives it more attractive financing than others can obtain. And it spreads its risk through a diversification of property types. And with an 8% expected increase in stock price and yield of 9%, Messrs. Gadsden and Lieber expect a 17% total return from iStar in 2003. A third pick is Chelsea Property Group. Chelsea's return on equity of 15.1% compares with an 8.7% average for REITs, and it has good prospects for new development. Update: A Real World Experiment in Stock Picking Factoid original content The following tables update the results in the experiment on stock picking.
First, two months is not long enough to tell anything, and I knew that going in. I am ahead of the indexes, and on first refection, I was VERY happy about that. But I am only ahead by a little above $300. It was not worth the time and effort to get so small a result. And that result can be singled out to a bet on one stock, HIW. I was hurt by over-weighting the health care sector. But that is a mistake I would repeat. I omitted mortgage REITs in the selections, and I would not repeat that. I still believe that MLS is going to perform better in the future. RSE should have a higher price than SPG based on future earning expectations - but that may happen by SPG falling, not RSE rising. I think that HR will bounce back - being hurt by being in a bad sector, but being a good stock. HIW has room to gain because its dividend is safe - I hope. And VNO, with its expected FFO growth in '03, will be a great performer - if those expectation are still 'current'. I am already getting an emotional connection to these inanimate objects. I know better than that - but it is happening. It is a good thing I have a sell discipline. But upon re-reading those guidelines, I find it lacking. It is too much 'I'll close the door after cows left the barn'. At present, I do not have a solution to that problem. At least that effort was attempted. So the bottom line: I still have a rational hope of beating the index funds and making the effort worth the time. Six out of ten of the selections beat the average - only MLS, AMB, HR and VNO did not. And, with the exception of AMB, I have high expectations that the rest will be future star performers. But, I have the rational realization that some of the marginally superior performance of the portfolio was luck. I realize that the 'test group of ten' stocks would have been my second choice of stocks - and that group is doing badly. I know that some experiments end without a conclusion or 'finding'. I was hoping this experiment was not one of those. I am beginning to alter that expectation. Beyond the bottom line - it took courage to beat the index. A timid buyer would not have chosen HIW. And it took discipline. Buying any apartment REIT, given their earning expectations, was not rational, but necessary to have a balanced portfolio. And it was those selections [HIW, UDR and HME] that were the only double-digit gainers in the group. I want REITs for my retirement portfolio. If beating the index takes courage and discipline, then maybe I can handle that for now. But if I were retired, then I would rather be fishing and you can count me out. And I do not want to handle that much aggravation when 'that' time comes. There is one unseen upside to this effort. If buying a balanced portfolio of 10 stocks can so closely mirror the ETFs AND produce a more even flow of dividends, then I turn out a winner. Information on past RWR and ICF dividends is hard to come by. ICF may only pay out twice a year. Notice that the 'real' portfolio is the winner when it comes to dividends. So even if gross returns turns out to be even, I can re-define the conditions of victory and declare myself victorious. Sounds like a plan.
According to Census Bureau estimates, the number of U.S. residents aged 25 to 29 will have shrunk from 18.6 million in mid-1998 to 17.6 million by the middle of next year. But over the next five years, that tail-end of the Baby Bust of the 'Seventies will give way to the Echo Boom, the offspring of the Baby Boomers. The number of 25-to-29-year-olds will surge by 2 million, from 17.6 million in 2003 to 19.6 million by 2008. The number of folks 40 to 44, boasting a nearly 30% rental rate, will decline 1.9 million over the next five years, after increasing by one million over the previous five. And the 55-and-older crowd, with a 19% rental rate, will gain a whopping 8.3 million over the next five years, following an increase of 5.9 million in the previous five. Apply rental-share estimates for 2001 to the change in each age group, and the net result is this: The number of renters 25 and older will likely have grown by one million from July 1998 to July 2003. But that number will jump by more than twice as much - 2.3 million - from 2003 to 2008. Apartment Valuations Table Barrons 12-23-02 with added data columns from WSJ (dividends and price-to-sales) and self-originated column (dividend-to-FFO)
Apt. REITs in Trouble Smith & Stockman, WSJ 11-13 Post Properties announced late Tuesday that it would cut its quarterly dividend for the first quarter of 2003 by 42% - to 45 cents from 78 cents. [Data in table above may not reflect that change.] In a report Tuesday, Morgan Stanley said three other apartment companies - Gables Residential; Summit Properties; and Mid-America Apartment Communities - had projected shortfalls in the cash flow needed to cover 2003 dividend commitments.
Simon Property Group saw occupancy rates tick up a full percentage point - a healthy increase - to 92% for the third quarter, while average rents and sales per square foot also rose. The gains took place even as consumer spending slowed and many mall-based retail tenants struggled. It makes for a paradox that can't last forever - poor sales eventually catch up to malls, if too many retail tenants are forced to shut their doors - but the malls' current prosperity is expected to last at least through 2003. What the secret? It's the little things. Big mall operators now rearrange tenants into "clusters" of similar stores. Parking lots are built with higher ceilings (less forbidding to SUVs). Most malls now are built with a "softer" feel - wood, natural light, carpeting, cushy chairs and "family" bathrooms, where both men and woman can go to change babies' diapers. Mall operators continue to have long-term worries - principally, fallout from faltering department-store anchors. Retailers come and go: Simon says seven of its top 10 tenants a decade ago have changed: Many of them went out of business and had to be replaced. Shoppers' average number of trips to the mall has stagnated at 3.4 times per month in the 2000-2001 period, about the same as in the prior two years; and time spent at the mall has remained at about 78 minutes per trip, according to the latest study by the International Council of Shopping Centers. Still, shoppers are spending more, ringing up an average of $75.10 per trip in 2000-2001, up 8% from an average of $69.50 during the 1998-1999 boom. Mall Obsolescence Ralph Bivins, Houston Chronicle 12-7 An estimated 250 of the nation's 1,200 regional malls will be closed in a few years, according to a report by the Lend Lease realty firm and PricewaterhouseCoopers.
Undistributed Capital Gains Some mutual funds and REITs keep their long-term capital gains and pay tax on them. You must treat your share of these gains as distributions, even though you did not actually receive them. However, they are not included on Form 1099-DIV. Instead, they are reported to you on Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains. Dividends received in January If a regulated investment company (mutual fund) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. You report the dividend in the year it was declared. Return of Capital You may receive a return of capital or a tax-free distribution of more shares of stock or stock rights. These distributions are not treated the same as ordinary dividends or capital gain distributions. A return of capital reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. When the basis of your stock has been reduced to zero, report any additional return of capital that you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. Example. You bought stock in 1990 for $100. In 1993, you received a return of capital of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a return of capital of $30 in 2002. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2002. You must report as a long-term capital gain any return of capital you receive on this stock in later years.
Just as with housing prices, corporate real estate values have risen quickly in recent years, to the point where many companies feel as if they don't have any choice but to put out the for-sale sign. Plenty of other companies have reached the same conclusion in recent months, according to Real Capital Analytics Inc., which tracks the corporate real estate market. During the third quarter alone, corporations sold 103 properties worth $1.3 billion, up from 66 properties worth $994 million in the same period a year ago. The tracking firm forecasts that 312 corporate properties will be sold by year end, eclipsing the record 283 sold a year ago. 'There has been a lot of capital flowing into corporate real estate lately,' said Robert White, president of Real Capital Analytics. 'There are just a tremendous number of players bringing money to the table, from REITs to the Germans to institutional players.' Germany, White said, changed its tax law recently so that real estate investments overseas are more profitable for the country's businesses than are domestic investments. German investors have tripled their portfolios of US corporate real estate holdings in the past six months, he said.
The $100 million undertaking, unveiled in late 2001, literally blew apart a fortress mall surrounded by a moat of blacktop parking, replacing it with the town center missing in the Valley's sprawl for all these decades. A rich mix of inviting piazzas and esplanades provide the setting for street-level stores, al fresco restaurants, and outdoor performance stages. These amenities are calculated to appeal to affluent knowledge workers like those at Warner Bros. Animation Studios, an outfit that has moved into space carved out from a former Robinson-Mays department store. In essence, the redevelopment shrank the Galleria's 1.25 million square feet of retail and entertainment space by more than a third, replacing it with 700,000 feet of commercial space, already 85% leased. "We turned that mall inside out," says Andy Cohen, managing principal of the Los Angeles office of Gensler, the architecture firm that handled the project. Although it has been open barely a year, mall experts believe it's panning out so far, although the developer has not revealed financial details. Dozens of such transformations are occurring all over the country, from Southern California to Denver to Columbus, Ohio, as developers try creative ways of rescuing malls driven under by population shifts, retail overbuilding, and the demise of the department stores that are the shopping centers' typical anchor tenant. So far, retailers seem eager to get involved. Even as some cut back on expansion plans in a weak economic climate, they're flocking to these "Main Street" redevelopments. With two-thirds of the nation's biggest malls more than 20 years old and hundreds estimated to be struggling, mall reinventions have plenty of proving grounds. That's particularly true at a time when new-mall construction is moribund, with fewer than half a dozen regional malls being built. While mall developers and retailers have taken heart from the apparent successes of Florida's Mizner Park, which opened in 1998 on the site of the demolished Boca Raton Mall, and the Sherman Oaks Galleria, a few high-profile projects have already run into trouble. In San Jose, the Silicon Valley technology bust vaporized commercial and residential demand just as an ambitious redo of the failed Town & Country Mall was opening under the name Santana Row. That, along with a major fire in August, prompted developer Federal Realty Investment Trust in Rockville, Md., to abandon plans for future Main Street redevelopments in order to return to its roots in grocery-anchored shopping centers. A question mark remains: whether the redevelopments, with residential as well as retail and commercial components, will prove viable. True, having residents on-site creates an extra layer of retail demand and contributes to activity at times that the malls might otherwise be deserted. But residents compete for parking space, complain about noise and congestion, and create needs for service businesses that may be incompatible with the mall. Will the trend be sustained? With city governments increasingly willing to use their own resources - from their powers of eminent domain to revenue bonds and tax-increment financing - to tilt development toward uses that will create vibrant, pedestrian-oriented districts, odds are good that it will.
Torto: We are concerned about that. There are those who are focusing primarily on well-leased downtown office properties, which have more bond-like aspects. Those properties are getting pretty good returns in the high single-digits, and prices are getting bid up. But we also see evidence of people, particularly syndicates and high-net-worth individuals, buying real estate as an alternative to the stock market. Those individuals have captured 51% of the market in the first three quarters of 2002. They're stepping in to buy office and small retail properties, and we are concerned they don't fully understand the growth assumptions for these properties and the implications for them of the slowdown in capital spending. Wheaton: There are two markets: one is the user market and one is the investor market and that's where there's a disconnect. The user market is, of course, very weak and the investor market is very hot, given the alternative rates of returns provided by real estate. The fear is, as lots of investors move into real estate, prices will remain high and that will encourage new construction. Q: Is there evidence this new investor interest has spurred new development? Wheaton: In the apartment market, in some areas, demand has weakened at least somewhat in the past year. Private construction has shown very, very little let-up. Torto: Industrial-property supply is down about a third, but vacancy rates in the industrial market are higher than they've ever been. Rents have been falling like a rock, and while construction is down a bit, there is still way too much activity going on there. Wheaton: Real-estate investment trusts may offer attractive income streams in the long run, relative to anything else around - they're running 7%, on average, for the first three-quarters of this year - but in the next year or two earnings at the industrial REITs could get hit quite hard. The next few years could prove worrisome because it takes about a year, sometimes two years - and it's been 18 months now - for softening rents to work their way in and affect earnings. Q: Are the softening rents specific to certain markets? Wheaton: It's broad-based and depends as much on property types as geography. The office and industrial markets are seeing 20% to 40% drops in rents, so in the next two years, you are going to see comparable decreases in the income stream. The market that has been least hit is retail - food stores and shopping centers - and the apartment market is somewhere in the middle. This recession is very different than the one in 1990. This economy is being supported by the consumer. The recession of 1982 and the recession of 1990 were caused by the Federal Reserve raising interest rates and by the consumer being hit very hard by tight credit. It was a completely different scenario. Same-store sales in lots of places are a little flat, maybe down a little bit, but consumer spending has held up and the retail market is in relatively very good shape compared with others. Q: If we're experiencing a "jobless" recovery, what's the outlook for real estate? Torto: We are looking at this much more like the economic recovery in the early 'Nineties, which was characterized by a recovery in output but little improvement in employment. Generally it takes about six quarters to go from peak employment to the trough and back to the same level of employment that existed at the peak. This time, we think it will take 12 quarters. There'll be excess capacity in all forms of commercial real estate until the fourth quarter of 2003. Wheaton: The 1989-1991 debacle was caused by a huge amount of overbuilding. Yet during that recession, net absorption never turned negative. It went very low, but never turned negative. In contrast, this recession isn't characterized by oversupply. In most markets, the office-building supply just got started in the past couple of years although industrial construction may have been running a little bit ahead of itself. Shopping-center construction was low. The distinguishing feature of this recession is the absence of demand. The net absorption of industrial and corporate office space is hugely negative and has been for a year and a half now. That has never happened before. Torto: Part of what has happened since the bubble burst in 2000 is that companies put a lot of sublet space on the market, space that was leased in anticipation of growth that never occurred. At the same time, Corporate America turned much more cost-conscious. But company behavior changed. In the past, companies would let their excess space sit idle. Now they are aggressively trying to get rid of it and putting it back onto the market and handling it in a manner similar to labor costs. Q: What about price cuts to spur demand? Is that not working? Wheaton: Rents have fallen, by 10% to 25% depending on the market. But it hasn't been enough yet to cause a major revival of interest by tenants. Q: So where do things stand now? What are the implications of all these trends? Wheaton: It varies enormously by product type. In office and industrial, the core corporate market, there'll be a slow recovery. Rents may still drop for another six to nine months. The short-term investment outlook for these property types is very, very cloudy and there's considerable risk for the next three years, in this really soft market. Other markets are very, very different. The apartment market is mixed. Middle-income bread-and-butter apartments seem to be doing very well, but high-end apartments, where people stay a year or two before buying a home, aren't doing well because with low interest rates people are just buying homes. Retail should be okay. Even if the consumer caves in, or we have a double dip, it will probably be a very temporary problem and will bounce right back. Q: What are the highest-profile areas that you would avoid at this point? Torto: I wouldn't avoid any place if I were buying it at the right price. That said, what comes to the top of our list as being too pricey is Boston, downtown Boston in particular. Q: What about San Francisco? Torto: We are more optimistic there. We think San Francisco is going to rebound over the next couple of years. Our forecast is for single-digit vacancy rates by the end of 2004.
But not so fast. Northrop Grumman IT is indeed hiring hundreds of workers, mostly computer programmers. But it has no intention of leasing more space, said spokesman Mark Meudt. The reason: The firm already has more space than it needs, having inherited many leases from acquired companies. Much of that empty space isn't being sublet. In some cases the company wants to hold onto it just in case; in others there are security reasons to keep other tenants out of Northrop's space. Even though Northrop Grumman, it doesn't show up in the area's already huge office vacancy rate of 30%. Many companies are in similar situations, which could spell bad news for commercial real estate in the year ahead. It's called shadow space: office space that tenants aren't using, but which they do not formally put on the sublet market so that others might occupy it. It might be a couple of unoccupied offices at the end of the hall, or even a whole building on a secure corporate campus. There's no way to quantify it - by definition, shadow space doesn't end up in vacancy numbers - but some who research local real estate say there is more shadow space out there now than normal. That could mean that even if the local economy recovers in 2003, the commercial real estate industry would lag behind. For a company with a handful of empty cubicles and rooms spread across a large office, it may not make financial sense to sublet, explained Tom Fulcher, a senior broker at Julien Studley. First, a company might have to rearrange its staff to consolidate the empty workspaces into one area. Then new walls or other construction might be necessary to make the unneeded space usable for another tenant. Then that subtenant must be found, in a market already glutted with space. Further, many companies with shadow space plan to use it eventually when their own business picks up. "There's a level of pain to going through the process of subleasing, so if you go from 30 employees to 20, it's probably not enough space to bother," said Fulcher. The Shadow Expense J. Martin McOmber, Seattle Times 11-10 The Puget Sound [Seattle] region trails only San Francisco and New York in the percentage of sublease space on the market, according to commercial real-estate analysts CoStar Group. While the amount of sublease space hasn't immediately hurt building owners, who collect rent even if space is vacant, it has dragged down dozens of companies, squeezing tight profits more and creating millions in losses. RealNetworks, the digital media company, lost $39.2 million on empty office space last year. Onvia, an online government-contracting service, lost $5.2 million at its two Seattle buildings. Amazon expects to lose as much as $68 million over the life of its leases for unnecessary office and warehouse space.
Since the number of publicly traded REITs ballooned to 226 in 1994, industry watchers have routinely predicted a wave of consolidation in the industry. The total has since dwindled to 177. In 1997, there were 52 REIT mergers, according to market research firm Dealogic, but the combined tally over the last three years has been just 50. As the market slides, stronger players are emerging, leaving weaker companies susceptible to a takeover. Simon [up 18% in 02] and Taubman [down 1% in 02] exemplify that trend. "The market is becoming increasingly uncomfortable with laggards and is fearful of dividend cuts," said Sam Lieber, the chief executive of Alpine Management & Research, whose two U.S. real estate mutual funds have about $98 million under management. "That should extend the disparity in valuations and that alone could lead to some M&A activity." But some people say the Simon-Taubman fight simply exposes the complicated ownership structures that act as barriers to more mergers. To get their favorable tax status, REITs must restrict any five individuals from owning more than half of the company, which works simultaneously as an anti-takeover poison pill. The structure has never been examined in court. More on Taubman Brown & Stockman, WSJ 11-20 The Taubman family controls both Taubman Centers and Sotheby's Holdings. The auction house has been battered by price-fixing charges that put then-Chairman A. Alfred Taubman behind bars. Alfred Taubman founded Taubman Centers 50 years ago, and is the father of the mall company's current chairman and chief executive. Taubman Centers, among the smallest of the major mall operators, owns 21 of the most upscale malls in the country. From Dean Starkman, WSJ 11-14: Taubman has just completed the bumpy rollout of five new shopping malls - a huge development pipeline - in the past two years. New malls in Dallas and Miami had rough starts, but another in Orlando, Fla., known as Mall at Millenia, opened just last month with 96% leased and is considered a big hit. Simon's Response to Taubman Andrew Sorkin, NY Times 11-14 Simon accused the Taubman family of gaining its voting control of the company through special stock that was "surreptitiously" issued during a restructuring after the G.M. Pension Trust shed its position in the company in 1998. "We question both the propriety and validity of a transaction which attempts to transfer to the Taubman family control and a permanent veto over material decisions that rightfully belong to the public shareholders of Taubman," Simon CEO David Simon wrote. Mr. Simon contends that the Taubman family was issued the special stock - Series B shares - that cost only $38,400 but gave it blocking rights to any takeover. [In contrast, Simon's bid for Taubman is $1.48 billion] "This entrenchment device is a permanent corporate governance defect embedded in the company's structure - and it continues to hurt the public shareholders," he wrote.
"The real estate fundamentals are as weak as they've been in the last decade," said Thomas A. Carr, chairman of CarrAmerica Realty Corp., a Washington-based REIT with holdings in large cities nationwide. "And we're not expecting a significant change in the next year." Whether specializing in offices, apartments or retail space, REITs are facing an environment in which enough properties were built during the boom years to make new development opportunities rare. Prices to buy existing properties are high. It all leaves REITs facing a fundamental question: What to do next? For some locally-based REITs that specialize in office space, the answer may be nothing. That is, they do not necessarily plan to expand much in the years ahead, but rather to focus their efforts on squeezing every dime possible out of their existing portfolios. Now, Carr said, the company seeks to operate as best as it can in a tough market by buying or selling only the occasional undervalued or overvalued building. "Our current emphasis is keeping buildings full and maintaining a conservative balance sheet," he said. "Then, longer term, we very much desire to grow through acquisitions, but we're going to wait until the time is right." "It's a strange phenomenon of prices of real estate escalating while the leasing market is stagnant," said Edmund B. Cronin Jr., chief executive of the Rockville-based Washington Real Estate Investment Trust, which owns office buildings, apartments and retail space in the region. He said that although his firm is continuing with acquisitions, totaling $80 million to $100 million a year, finding reasonable deals has become difficult. The firm is proceeding by buying buildings with moderate vacancy levels; investors flush with borrowed money are paying too much to make fully leased properties economical for Cronin's firm. "We can be selective and look for properties with a couple of vacancies, where there's a real upside potential," he said.
Earlier in the day, a panel of real estate analysts was similarly pessimistic about the industry in the face of sluggish job creation. "There are no property types that have positive outlooks right now. There are just different levels of deterioration," said Gregory Whyte, managing director at Morgan Stanley. "The apartment market is in . . decline - it's going to keep going down," said Lee Schalop, managing director of Banc of America Securities. Some industry observers predicted that even mall REITs - one of the industry's few bright spots - will decline during the next 18 months or so as consumer spending decreases. "There's a realistic chance that we could see a sharp drop-off in mall occupancies" in 2004 and 2005, said Mike Kirby, principal at Green Street Advisors. David Shulman, managing director at Lehman Bros., said REITs as an alternative investment vehicle have peaked and have nowhere to go but down.
Scudder RREEF is the 13th closed-end real-estate fund to register for an initial public offering with the SEC this year, up from three last year. The closed-end funds, which have a fixed number of shares that trade like stocks on an exchange, boost returns by borrowing money at short-term interest rates and investing it in higher-yielding, long-term securities. That leveraging helped the eight closed-end real-estate funds that have traded throughout this year to post an average dividend yield of 9% as of the end of last week, according to Mercury Partners LLC, an investment-banking and research firm. Meanwhile, the average yield on open-end real-estate funds was about 4%, according to fund tracker Lipper.
In an earnings conference call Tuesday, after stating that rent levels are now in some markets 10% to 15% below those before Sept. 11, 2001, Equity Residential's chief executive, Douglas Crocker II, said the decline should actually make rents more competitive on a price basis with single-family homes and help lift the apartment sector out of its doldrums. "For the first time in over a year, the affordability index between owning and renting has been restored," said Mr. Crocker. "And while it will take the next nine months for these lower effective rents to cycle through the rent rolls of the multifamily sector ... we should see a continuation of the increased occupancies we've seen recently. Our industry is now well positioned for recovery." D-FW Apt. Update Steve Brown, Dallas Morning News 11-7 Continued building and declining employment will batter the apartment sector in the next year, industry analysts warned as M/PF Research made its annual forecast Wednesday at a conference of Texas apartment developers, investors, lenders and brokers. "As we look ahead, it's not going to get much better in 2003 - in fact, it will probably get worse," said Greg Willett of M/PF Research. "Over the last 18 months, the number of renter households in Dallas has dropped by 5,000 to 6,000." Apartment rental rates in Dallas are down about 2.5% this year, and occupancy levels have fallen to around 92 percent. And with more than 13,000 apartments still under construction in Dallas-Fort Worth, Mr. Willett predicts that occupancy levels will drop further. Almost 40% of Dallas-area apartments are offering free rent and other giveaways to attract tenants, according to M/PF Research. Investors aren't put off by the forecasts and scare stories. Bob Stone, a lending officer with Guaranty Bank, said investor demand for apartments is "just incredible." "The good news is the unbelievably low interest rates," Mr. Stone said. "There is an abundance of capital chasing deals." And even with "a horrible economy and now job growth," he says, developers are hunting money to keep building. More Hope Elizabeth Harris, NY Times 11-10 Low interest rates have been a bonanza for homeowners, but they have hurt investors in real estate investment trusts that own apartment buildings. Roughly 68% of American families now own homes, up from 64% in 1994, according to Green Street Advisors. The pool of renters shrank. Vacancies in apartment buildings have risen to 10.5% this year, from 9% at the beginning of 2001, according to Torto Wheaton Research. Through Thursday, shares of apartment-building trusts have fallen 8.5% this year, underperforming the overall market for REITs, which have risen by 1.1%, according to NAREIT. David Lee, manager of the $114 million T. Rowe Price Real Estate mutual fund, said he sees the current weakness of apartment-building REIT's as a buying opportunity and has been increasing his holdings. "We are at record levels of single-home ownership and I'm not sure that trend or head wind can get substantially worse," Mr. Lee said. Lee said he believes that the sector will rebound gradually after the economy improves. As of the end of September, his biggest holdings of apartment REIT's included Equity Residential and AvalonBay. Marvin Banks, the chief financial officer of Gables, said that even if some short-term factors were troubling, long-term trends favored the sector. Through 2020, census estimates show that the number of new renters will surge as baby boomers' children hit their peak renting years, he said. "During the last 12 months, we've been at this low point that has coincided with a recession and low mortgage rates, so if your holding period is three months, REIT's are not where you should be, but if it's 12 months or beyond, it's a safe bet," Mr. Banks said.
About a dozen royalty trusts have NYSE listings, but no one pays much attention. There's no investment banking revenue to attract brokerage firms. There aren't even any employees - just a few bankers hired by the trustee to mail out monthly checks. And oil and gas are classic 'wasting' assets. Eventually, the wells run dry, and your trust shares will be worthless. Despite all this, royalty trusts aren't disappearing as fast as you'd think. The audited reserve life of the trusts in my table averages only 10 years, but that's a conservative number. Oil production keeps improving, and higher prices would make it profitable to pump reserves that are marginal today.
Two other strong points: One, royalty trusts are an inflation hedge and handy insurance if an oil crisis brings down the rest of the economy. Two, they attract smart people. The billionaire Robert Bass has a sizable stake in San Juan, as does respected money manager Jean-Marie Eveillard, whose First Eagle SoGen funds are actually making money this year. My table gives a sense of the relative position of each trust. But be cautious about the numbers. Even though yields have averaged close to 10%, payouts vary depending on oil prices and well upgrades. San Juan distributed nothing in December and January, but 40 cents in March 2001. There are also tax advantages. Unit holders can deduct depletion, which defers much trust income. Quick Facts, Stats & Opinions REITs in 2003 and Beyond BusinessWeek: Real estate investment trusts as a whole have had two years of double-digit returns to shareholders and are outperforming the market again this year. Can they do it again next year? Richard Kincaid, CEO of EOP: It depends on your market assumptions. If you listen to someone like Warren Buffett, who predicts that equity returns are going to be in the 6% to 7% range from now on, and we've got an 8% dividend, I could argue that that's not a bad bet. (BusinessWeek, 12-20) Why Mall REIT's are Different [The mall sector] is one of the only REIT property types where the public companies have a majority control of the truly institutional-grade assets out there, so market share is truly a force in this group. In most other property sectors, the public markets will own somewhere between 5% and 15% of the investment-grade assets. In the mall group, they own well more than 50% now. (Morgan Stanley vice president Matthew Ostrower, RealEstateJournal 12-12) REIT Penetration Changes: 2000 to 2001 - Prudential July 2002
Home Page Previous REIT Update Top Sites
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||