|
Current Factoids Previous REIT & Stat Updates 2004 Updates 2003 Updates Sept Stats Sept Update August Stats August Stats August Update July Stats July Stats July Update June Stats June Stats June Update Real Estate & REIT Links CommPropNews Globe Street ICSC NaREIT NREI Property Property MagPortal Real Estate Journal Reis ReBuz RealtyStocks NAIOP ShopCenterToday ShopCenterWorld The Slatin Report Factoids Current Issue Q3-03 Index Q2-03 Index Q1-03 Index Q4-02 Index Q3-02 Index Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Biz Links Business News Columnists Econ Reports Stock Exchanges Searches Tax News |
Unfortunately for investors, it is difficult to predict what category of income a REIT will pay out in a given year because the numbers fluctuate sharply, depending upon asset sales and other variables. According to Nareit, the proportion of those distributions attributable to lower-tax-rate items has risen every year since 1998. If REITs paid out only the income they generate from their real-estate operations, then REIT investors would lose out on the lower dividend-tax rates available to other investors. But peel apart the distributions that REITs pay, and you see that the payout often comes from a variety of sources, each with its own tax implications. In response to Congress lowering the top dividend-tax rate to 15%, "most of the commentary focused on the nature of company, not on the source of the income that is distributed," says Michael Grupe, senior vice president at Nareit. And it is the source of income that determines the tax rate. Some of the income the REITs are paying out comes in the form of "qualified" dividends, meaning it's taxable at the 15% dividend-tax rate because the income was taxed, for whatever reason, before the REIT distributed it to shareholders. Some income comes from capital gains. Other income from REITs is return of capital, when part of your original investment is returned to you. Such a distribution lowers your cost basis, so you will pay capital-gains taxes when you sell. Take Camden Property Trust, which distributed $1.905 a share to its shareholders. Of that, nearly half was taxable at rates lower than ordinary-income rates: 71 cents came from long-term capital-gains distributions; another 22 cents came from another type of capital gain associated with depreciation that is taxable at a 25% rate. Or consider Avalon Bay, which distributed $2.80 a share, of which 61% received capital-gains tax treatment, while the remainder was taxed as ordinary income. At Affordable Residential Communities, 100% of the $1.087 that the company paid shareholders last year is treated as a nontaxable return of capital. So how consistently do REITs provide dividends that are taxable at lower rates? Nareit research going back to 1995 shows that the percentage of annual REIT distributions taxed at lower-than-ordinary-income rates has ranged from 17% to 37% last year.
In Q1, 20 of the 36 companies that Lehman tracks reported insider selling, which is down from 22 companies in the fourth quarter. Sales totaled $169 million, down from $271 million in the fourth quarter. Insider selling was heaviest at Simon Property, SL Green, Kimco), Vornado, AMB Property, Arden Realty, and Archstone-Smith. However, inside buying also declined, which may indicate insiders don't yet feel stocks are cheap. It totaled only $1 million, down from $33 million in the fourth quarter. Insider purchasing only took place at Kite Realty and Post Properties, the report said. About 77% of all sales in Q1 were related to insiders excercising options rather than outright sales. "REIT insiders' eagerness to sell was evident in Q1 even as stock prices began to backtrack," the report said. The Morgan Stanley REIT index fell 7% in Q1.
Real-estate mogul Sam Zell, chairman of EOP and EQR, said during a panel discussion that "in an environment of excessive liquidity," he thought the industry would be dealing with lower yields, or cap rates, for the next nine years. While that would mean the income streams generated by real estate would be low, the prices paid for buildings would remain strong. "The wealth of liquidity" in the real-estate market means "assumptions have to be rethought," he said, adding that real-estate prices would stay high and cap rates, which are the estimated rate of return on a property at the time of the purchase, would stay low for another nine years "rather than 90 days." But Mr. Zell's co-panelist, Anthony Downs, a senior fellow at the Brookings Institution, told the audience that Mr. Zell's forecast was too optimistic, pointing out that prices were vulnerable to a sharp increase in interest rates or better performance by the stock market, which could pull investors away from real estate. "Something is likely to change the flow of funds into real estate. To think low cap rates can go on indefinitely goes beyond what the evidence would support," Mr. Downs said. He added that this flood of capital makes now a "great time to sell," implying that real-estate prices are nearing their peak with little price upside left. "Sell whatever you don't want to keep," he said. Mr. Zell agreed that it's a good environment to "sell what you don't want to own." He said EOP has been selling a lot of assets out of markets where the REIT doesn't want to be in long term. Mr. Downs observed that the flood of capital hasn't spurred new development, except for construction of an upscale form of shopping centers known as lifestyle shopping centers and residential condominiums. But he wondered aloud how long it would be before developers would start building again, especially as fundamentals improve. Mr. Zell added that high construction prices as well as better information in the real-estate industry than in the past have played key roles in keeping development in check. Mr. Downs worried that condo construction was an exception. "When investors get on a new bandwagon, there's always a propensity to overshoot the mark. I think that's happened in high-rise condos," he said. He said he didn't see a housing bubble because single-family homes tend to be owner-occupied. But he said there could be a condo bubble, especially as condos attract investors and speculators. One broad point made by the panelists was that investors are pricing assets as if the fundamentals were universally strong and the future solid and predictable. Neither, of course, is true. Then they went on to list all of the things that could go wrong, leaving investors vulnerable. There were concerns raised about the widening U.S. trade deficit and how that might affect interest rates and, ultimately, real-estate prices. Higher interest rates could result "if foreigners don't want to hold dollars or government securities," said Raymond G. Torto, principal and chief strategist of Torto Wheaton Research. He warned that higher rates could reduce the value of buildings. "If the deficit causes [the Federal Reserve] to raise interest rates, that could have effects on the level of cap rates. Rising cap rates have implications on pricing for real estate." Rising interest rates also have implications for buyers. Some attendees worried that too many buyers are putting too little cash into their deals and levering up to the hilt. "So much of the borrowers don't have a lot of equity in their deals ... ; for some of us that have been in past cycles, it's starting to look like the situation that occurred in the late 1980s and early 1990s, when lenders took back properties," said James Lee, a senior principal at Kensington Realty Advisors, a Chicago investment adviser. "If there is any kind of a hiccup or rapidly rising interest rates, there's not a big cushion. So if something happens, there could be a lot of lenders subject to taking back properties." Mr. Torto of Torto Wheaton and others also expressed concerns about high oil prices, which they feared would slow U.S. economic growth. Slower growth would mean a slower recovery in commercial real-estate fundamentals.
The vacancy rate in strip malls edged up to 6.9% in Q1 from 6.8% in Q4-04 as absorption slowed to 3.2 million square feet in Q1 compared with nine million in Q4-04. But rents were up 0.6% to $18.09 a square foot in Q1 from $17.98 a square foot in Q4. Part of the reason why mall landlords are doing so well despite inconsistent job growth and cooling consumer confidence is retailers' belief that if they continue to build stores, shoppers will come. Whenever retailers face sluggish sales, they lease more space. "That strategy can't persist forever," said Lloyd Lynford, chief executive of Reis. Also adding to the uncertainty in retail real estate is the wave of consolidation in department stores. Still, retail real estate has outperformed the other sectors of commercial real estate in the past five years and the high barriers to entry in building shopping malls means supply is flat or even shrinking. Construction of strip malls, meanwhile, is expected to top 29 million square feet this year, about 17% more than was built in 2004, according to Reis.
“The market isn't very good,” admits Douglas Johnson, regional development officer for IDI in Dallas, which completed a 295,000 sq. ft. speculative warehouse in the Dallas-Ft. Worth Trade Center, adjacent to the airport, back in December 2003. In 15 months, IDI has leased all of 50,000 sq. ft. in the building, though Johnson is not entirely disconsolate. Can't Sell from an Empty Wagon “We built the facility at a low price and so it hasn't been hard for us to carry,” explains Johnson. “The feeling in this market is that you have to have some kind of product available to show tenants. You can't sell from empty wagons or sit on your hands forever. Either you maintain your market presence with buildings ready to go, or people will forget about you.” IDI delivered another 250,000 sq. ft. building in the Pinnacle Park off Interstate 30 last year, and still hasn't filled that either. A similar attitude of “damn the torpedoes and keep building” has gripped most of IDI's competitors around the country. With the notable exception of the Inland Empire near Los Angeles and pockets of the central New Jersey market, industrial vacancies remain stuck at high levels in many markets, and the recovering economy has not yet unleashed a torrent of tenant demand for space. In Atlanta, Blaine Kelley, a first vice president with CB Richard Ellis, reports vacancies running close to 17% in many submarkets, with rents flat for three years running and new leasing activity in 2004 totaling around 30 million sq. ft., less than half the approximate 75 million sq. ft. level of 2000. Still, there are spec projects everywhere. The nation's largest industrial owner, ProLogis, finished work on a 570,000 sq. ft. spec building in the Greenwood Industrial Park south of Atlanta two years ago. The first tenant, taking 250,000 sq ft., was just secured. Now, a suddenly encouraged ProLogis is laying plans for an addition to take the original structure to over 1.1 million sq. ft. The pace of new construction has left some local Atlanta real estate veterans in disbelief. “Maybe it's because of the low cost of capital or for tax reasons, but we are already in an overbuilt market in Atlanta and local developers are deciding to build even more,” says Kelley. “It's going to take at least a couple of years to burn off the vacancy we already have and get back to a reasonable 10% vacancy rate. But if this spec construction continues, the vacancies could stay high for a lot longer.” Many developers, who shut down their spec construction programs in the aftermath of 9/11 nearly four years ago, are erecting new buildings again. These developers are counting on somehow filling these spaces later this year as the new product comes on line. Will some of these developers be disappointed? Maybe, but most have underwritten their pro-forma budgets conservatively. At IDI, Johnson told his lenders to expect a full 24-month lease-up period and advised them to have few illusions about the economy returning to the excesses of the late 1990s. So far, unfilled spec capacity doesn't seem to be causing any great pain or hardship within the developer community. Unlike the great real estate recession of 1990-91, when industrial vacancies in many cities exceeded current levels, lenders this time around have not been stepping in to seize struggling assets. Developers today have deeper pockets and more institutional backing than they had in past cycles plagued by vacancies. Still, developers may be taking on significant risk in some of their spec investments, and in some cases they are plainly getting out in front of actual demand for new space. Intelligent Exuberance? J.D. Salazar, managing principal of Champion Realty Advisors., says that vacancy rates are running 25% and higher in some Chicago submarkets, but developers appear undaunted. “Some of the institutional developers I'm working with are operating in a state of euphoria. Throughout the industrial sector there is a general confidence that the economy will keep growing this year, and imports of new merchandise from places like China will keep climbing, contributing to a need for new and ever larger distribution facilities. For now, developers are managing their risk intelligently. Barring a collapse in the economy in the near term, the consensus is that the splurge in spec construction will eventually be absorbed, though patience may be required. CoStar Group reports that the national industrial vacancy rate registered 10.1% at the end of 2004, with 1.2 billion sq. ft. vacant across the U.S. — three times the vacancy total in early 2000. New construction deliveries rose almost 14% last year, to 118 million sq. ft. from 104 million sq. ft. in 2003, according to CoStar. But absorption also rose, leading the research firm to predict that vacancy rates will fall into single digits by this summer. CoStar notes another positive sign: asking rents for warehouses last year edged up 2% to $4.80 per sq. ft. on a net basis. Why are developers pushing ahead on new construction? The overheated resale market is one reason, leaving developers greater margin for error. In the first nine months of 2004, there were 4,067 industrial sales transactions at an average price of $51.10 per sq. ft. That was up from 3,638 transactions at an average $47.50 per sq. ft. in the same period of 2003. In some markets, buyers are falling all over each other, bidding on even marginal assets. With many investors willing to accept a market capitalization of 7% and even less on industrial acquisitions these days, Steven Poulos, a principal at Chicago-based Bridge Development Partners, believes the industrial spec formula is nearly foolproof. Put up a building for $40 per sq. ft. in construction cost, borrow $30 of that cost, and then sell it off to a buyer willing to pay a 20% premium or more for your work in getting the site zoned and managing the construction. Find a rich tenant willing to pay full price for a lease, and the return on equity can reach 70% or more in some of these deals, says Poulos. “Buyers of industrial property are so hungry for assets that much of the development and construction risk is averted.” Older Properties Can Not Meet New Needs According to a recent survey by Colliers Bennett & Kahnweiler, its hometown market of metro Chicago has an industrial vacancy of 9.5%. But in the hottest new development submarket — the southwest suburbs around I-55 — the vacancy rate stands at an unhealthy 17%. Still, that hasn't stopped Liberty Property Trust from entering the market for the first time. Liberty broke ground on a 607,000 sq. ft. spec building this past October in suburban Aurora. Chicago is littered with new spec construction at the moment, but William Hankowsky, president and CEO of Liberty, isn't worried. Developers like him, he says, are building in the face of swollen vacancies in part because they don't trust the survey data. “The published vacancy rates typically include the obsolete space, such as buildings with 18 ft. clear ceiling heights with no sprinkler systems that a broker might be lucky to rent for a buck a foot,” Hankowsky says. “New spec space like ours with 32 ft. clear ceiling heights and the latest ESFR sprinklers don't compete with a lot of the older vacant space.” There is another reason the older spaces don't compete with the latest spec construction. Lynn Reich, executive vice president of Colliers Bennett & Kahnweiler, observes that today's spec product is important for more than just its sheer size. More and more tenants, she notes, are demanding extra trailer parking. “In some cases, the newest spec buildings are customized with more parking capacity, which gives them a real advantage over older-generation spaces,” she says. Liberty Property Trust was an active spec builder up until 2001, when it shut down its new-construction program. The firm reinitiated spec construction last year when it saw prices zooming upwards for older assets. “The acquisition market has become so tough,” Hankowsky says, “that it now makes sense to create your own product, particularly as the economy improves.” New Tenants With Short Time Frames Tim Hennelly, vice president of development for Ryan Cos., currently has four business parks in Chicago with spec space available in three of them, believes that speculative construction is a fact of life in any large-sized park these days. Build-to-suit deals represent less than 20% of all industrial development around Chicago today. “At least 80% of deals involve tenants making last-minute decisions who require space within three months. To serve the market, you have to have space available at all times. If you've got an empty park with no buildings, you're not an industrial player in Chicago,” Hennelly says. Of course, there's a reason that build-to-suit deals have become so rare in Chicago and elsewhere: Why wait for build-to-suit when you have so many spec buildings to choose from? If there is a bulletproof market anywhere in the U.S., it's Southern California and the Inland Empire, where vacancies are running under 8%, despite the fact that the total inventory of space has jumped 28% in the past five years to 343.5 million sq. ft. Empty land to build on is so precious that as soon as a developer can get entitlements on a site, a spec project is certain to follow in short order. Much of the spec phenomena has been led by the biggest industrial developers, and that's no accident, according to Larry Harmsen, a senior vice president with ProLogis. ProLogis will complete work on a sprawling 850,000 sq. ft. building near Fontana, right off Interstate 10, in June. There are no tenants yet, but Harmsen shrugs that off. His company is also working on a 1.2 million sq. ft. spec building nearby in Rialto that will deliver in the fourth quarter of this year. Harmsen keeps the development activity in perspective. “Add up all the spec activity in the Inland Empire right now and it's probably about 5 million sq. ft. or so. But the entire marketplace is well over 300 million sq. ft., so this is a pretty small percentage and easily absorbable,” he insists. What about the risk to the balance sheet of ProLogis? “We have over 300 million sq. ft. in our industrial portfolio worldwide, so one or two buildings here can't make that big of an impact,” Harmsen says. Rising Costs a Problem in Creating Competivie Properties If there is one universal concern of developers, it is spiraling costs. In 2000, the finished cost of an industrial building — with land and construction included — in the Inland Empire was slightly higher than $30 per sq. ft. But raw land values have soared since then just as construction costs have jumped 25% over the past year. Everything from cement to steel has climbed in price. As a result, Inland Empire buildings today are delivering for upwards of $50 per sq. ft.
The $22.3 million deal was completed in about a month, Mr. Schorsch said, and within a year, all but a handful of the vacant buildings had been leased or sold. "Our seemingly erratic bet turned out to be a wonderful business," he said. But it might have remained a relatively small business if Mr. Schorsch had not been introduced to Lewis Ranieri, the former Salomon Brothers trader who has been called the father of the securitized mortgage industry. It happened that Mr. Ranieri had been talking to an investment banking company, Friedman Billings Ramsey, about creating a publicly traded company that would acquire property only from financial institutions. Mr. Schorsch and Mr. Ranieri teamed up, raising $378.9 million from private investors in 2002 and going public the next year. Today, the company, American Financial Realty Trust [AFR], is among the most prominent players on a growing list of real estate investment trusts that specialize in niches of the market. Typically, these companies acquire property within their niches and sign long-term leases with tenants - often the previous owners - who occupy the entire building and are responsible for its maintenance. The only REIT specializing in financial institutions, AFR has announced $250 million worth of transactions just this quarter and is now a $4.4 billion business. The company owns 959 properties with 32.7 million square feet of space in 33 states and D.C. Bank of America is the company's biggest tenant by far, accounting for 46.8% of the rentable square feet as of Dec. 31. But though it has yet to win the confidence of Wall Street, AFR is catching on with a growing number of financial institutions. What makes American Financial unusual is its willingness to buy not just bank branches but an entire portfolio, including office buildings and data and call centers, real estate specialists say. The company buys in bulk at prices that are based on each building's appraised value minus a discount, which ranges from 4.5% to 10%. So, for example, American Financial will buy nearly all of the 174 bank branches - minus only those found to have environmental or structural problems - that the Wachovia Corporation plans to close in the Southeast as part of its merger with the SouthTrust Corporation. This type of one-stop shopping is very appealing to financial institutions. "Real estate is just incidental to their business," said James Corl, the CIO for real estate at Cohen & Steers. "Disposing of the excess in one fell swoop is very helpful to them." Sometimes, the banks will sell office buildings that they partially occupy to American Financial and rent just the space they need. "The main benefit to us is it transfers the risk of leasing that vacant space from us to AFR," said Robert Bertges, director of corporate real estate for the Wachovia Corporation, American Financial's third-largest bank tenant. Being able to delete vacant or underperforming property from a balance sheet is especially desirable in the wake of new accounting rules that require companies to carry their properties at market value rather than depreciated value, said Srikanth Nagarajan, an analyst at UBS. Schorsch said that when he first began buying empty bank branches, he expected to re-lease them to drugstores and fast-food restaurants rather than other banks. He had assumed that as the banking industry consolidated further and online banking became more widely accepted, the number of bank branches would diminish. But it turned out that bank branches were actually proliferating. From 1994 through 2003, the number of commercial banks and savings institutions declined by 29%, but the number of bank branches increased by 15%, according to the FDIC. And the trend is continuing. From June 2003 to June 2004, the number of FDIC-insured institutions declined by 194, to 9,066, while the number of branches rose by 1,594, to 89,814. "The single most important factor influencing a customer's choice of banks is the location of the institution's branches," the FDIC said in a report issued last year. Schorsch said that regional banks, in particular, were often eager to lease space that previously belonged to another bank and avoid the expense of installing vaults and the pneumatic equipment used in drive-through branches for transferring money. In cases where the seller does not want to see a competitor move into a shuttered branch building, American Financial either sells the building or leases it to a retailer like Krispy Kreme or Starbucks, he said. Skepticism about whether empty bank buildings will always attract new tenants is one reason Wall Street has been slow to embrace American Financial, analysts say. From the outset, when the company's principal tenant, Bank of America, helped to underwrite its public offering, the company has drawn criticism. Mr. Schorsch's rich compensation ($3.2 million in salary, bonuses and stock in 2003) has been questioned, although some people say it is not out of line. Some analysts are uneasy about the company because its business, while geographically diverse, depends on just a few banks, with its top 10 tenants accounting for 86.1% of its rent rolls. Critics wonder whether American Financial can add value to the buildings that it acquires because its leases are long term (the average is 14.7 years), with only small increases along the way. Mr. Schorsch said, however, that while many investors are buying much riskier buildings today with an initial rate of return of only 5% or 6%, his decidedly less glamorous acquisitions produce higher returns from the outset and offer greater stability. "We do boring well," he said. Eyebrows were raised last year, however, when American Financial bought the State Street Financial Center in downtown Boston for $706.9 million, twice what it had cost to build the 36-story tower, which was completed in 2003. Many real estate specialists wondered if the company had changed its business plan and was becoming an office REIT. But the building was fully occupied by the State Street Corporation, which had a 20-year lease with annual increases. "So while the buildings seemed expensive," said David Fick, a managing director at Legg Mason Wood Walker, "when you consider the cash-flow stream, it actually financially made sense." But Mr. Fick said that office buildings represented a disproportionate portion of American Financial's square footage. "Going forward, we expect to see more bank branches and less office," he said. And indeed, branches represented 13% of its rentable space by end of last year, up from 10% the year before - a trend that Mr. Ranieri said was likely to continue. "Now we're buying mostly branches," he said. "We will eventually wind up where we said we would be, in terms of the balance of the portfolio." Citing a favorite adage, Mr. Ranieri said he was not surprised that American Financial often found itself under attack. "You can always tell the pioneers, because they are the ones with the arrows in their back," he said. "When you describe the venture, it takes a while for people to understand it. It's not unusual when you create new things."
“Some major changes are taking place in society,” said Zell, chairman and CEO of EOP. “And these changes are translating into a series of dynamic, 24/7 cities. That’s where the workforce is going, and that’s where it will continue to be because people won’t gravitate as much to secondary cities.” He identified Des Moines as one such city. Zell is taking his own advice to heart. In November 2004, EOP sold off its five-building Houston portfolio, which accounted for 2.2% of the entire national portfolio. That same month, the firm also parted with its 4.2 million sq. ft. Dallas portfolio — and that chunk represented 3.4% of the firm’s total portfolio nationwide. Proceeds from these sales have financed several big coastal deals. Earlier this month, for example, EOP closed on midtown Manhattan’s Verizon building for $563 million. EOP isn’t alone, as other REITs have increasingly sold off midwestern assets. Data from Real Capital Analytics shows that REITs divested of roughly $5.7 billion in Midwestern office properties in 2004 — compared with $4.4 billion in 2003. With some minor exceptions, investor confidence in coastal markets is validated by the fundamentals. Grubb & Ellis shows that the steepest vacancy declines between year-end 2002 and 2004 occurred in coastal markets. Palm Beach County, Fla., office vacancy dropped 620 basis points, from 17.3% to 11.1% over that period. Orange County, Calif., meanwhile, came in second with a 490-basis point decline from 16.4% to 11.9% over that period. Orange County posted the strongest rental growth during that period, with average asking rents rising 15%, from $24.48 per sq. ft. to $28.16 per sq. ft. Demographics shed some light on why investor dollars are pooling along the coast. For one thing, markets such as New York, Los Angeles and Miami are international gateways with physical growth barriers. They are also magnets for immigrant labor, not to mention huge shipping hubs. New York is both a global center of culture and finance. Meanwhile, the cities along the southern California coast rely on entertainment, defense and biotechnology firms to keep their local economies humming. These markets are also better equipped to capture commodity jobs. That didn’t matter a whole lot a decade ago, but that was before Manila and Mumbai were siphoning off Iowa call center jobs. “What effect will these changes have on call center space in Des Moines? The answer is it won’t get filled,” said Zell during the conference. “When you consider globalization, it’s the large cities on the coast that benefit most. You also don’t see foreign investors pouring much money into Midwestern real estate,” says Peter Korpacz, director of Pricewaterhouse Coopers’ real estate research group. Foreign capital favored three U.S cities in 2004 — Washington, D.C., followed by New York City and Los Angeles. Interest in these coastal markets has driven prices up considerably over the past three years, and that’s quite a contrast to the Midwest [see chart, below - The Midwest was the only U.S. region to see the average price per sq. ft. of its office space fall over the past two years]. Meanwhile, Chicago came in sixth place after both San Francisco and Miami, reports the Association of Foreign Investors in Real Estate. “Most investors have had a bi-coastal strategy for a while,” says Tony Pierson, managing director of portfolio management at Cornerstone Real Estate Advisers LLC. The one thing that has changed, says Pierson, is the capital markets, which have become increasingly global. He doesn’t see that slowing down either, which suggests that core markets along the edge of the United States should remain liquid for years to come. “You have these huge cities with massive populations,” says Paul Briggs, a senior economist at Boston-based Property & Portfolio Research. “So when you ask an investor looking to hold an asset for a long time where they want to be, they will say on the coast. It’s a real draw, and it also gives investors an exit strategy.”
After several years of hard economic times, some REITs are accelerating development activities in strong markets. Increased hiring by corporate tenants is encouraging new building. REITs that are stepping up development include Boston Properties, Kilroy Realty, and Brandywine Realty. The emphasis on development reflects a shift from recent times when many REITs focused on buying existing properties. But now REITs that want to grow have a big incentive to build from scratch. With investors from around the world bidding on prime office properties, prices of existing buildings have reached record levels, says Reckson's Rechler. Prices have moved well past replacement costs in strong markets. Cap rates for existing buildings in Washington, D.C. range between 6% and 8%, says David Aubuchon, a security analyst with A.G. Edwards. But a developer who builds from scratch can receive a cap rate of 10%. “It makes no sense to pay $500 a sq. ft. for a building in Washington when you can develop a comparable property for $400,” says Aubuchon. Still, developing a new property comes with an element of risk. To avoid vacancy problems, Brandywine Realty Trust is focusing on submarkets where occupancy rates are at least 95%. Even then, it does not begin construction until the project is 50% preleased. The company currently has 75% of space pre-leased in its Cira Centre project, a $180 million development with 727,000 sq. ft. located next to the 30th Street train station in Philadelphia. “We feel confident in building now because we cannot meet the space requirements of our existing tenants,” says Gerard Sweeney, chief executive. Only a few REITs are aggressively pushing into development, says Aubuchon. For most companies, construction of new office buildings seems like a risky bet at a time when many markets still face substantial vacancy rates. Development ties up considerable capital, which can make conservative REIT investors nervous. To limit leasing risk, some REITs are focusing on build-to-suit work. CarrAmerica recently completed a 124,000 sq. ft office in Dallas that cost $16 million and was taken entirely by Washington Mutual. Still, REITs are reluctant to develop in weaker markets. Jamie Williams, president of CarrAmerica, notes that the climate for development shifts with real estate cycles. When the economy grew in the late 1990s, there was pent-up demand for office space and a healthy environment for developers. Then after 2000, the economy slowed, and demand for new space slipped. In 2004, the atmosphere changed in many markets. Now, Williams expects that the stronger economy will absorb new office space. “For the next year or two, conditions should be very favorable for development.”
The commercial real estate market is still well below where it was during the tech boom in the late 1990s and early 2000s, when rents hit $80 per square foot and the vacancy rate was virtually zero. There is about 12.2 million square feet of empty office space in the city -- much better than the 17 million square feet available at the bottom of the market in early 2003, but far from healthy. "It's a slow and steady process," said Joe Cook, head of Cushman & Wakefield. "But the fact that we've had several consecutive quarters of positive absorption is promising." More than 140 office deals representing 1.7 million square feet were signed in Q1, according to Grubb & Ellis. Most of the deals were for less than 15,000 square feet. Given that rents in San Francisco are at the same level as in 1996, many other large users of space are rushing to lock in the low rates. Tove Nilsen, research director at Colliers International, said several large tenants seeking 100,000 square feet or more are shopping for space. They include UCSF, Barclays Global Investors, Blue Shield, Gallo Institute, Sutter Health, Citigroup, Providian Financial and Advent Software. Without new construction -- a prospect that won't happen until rents reach at least $50 per square foot -- those tenants will have trouble finding contiguous blocks of space to meet their needs.
The office market in St. Louis was reported as "steady," while the Kansas City office market was described as "firming." The market industrial space in St. Louis grew, which could be accredited to the manufacturing section, which announced plans to open new plants in the nonmetallic minerals, electrical equipment and household appliance sectors, creating an estimated 130 new jobs. The commercial construction area found what the report dubbed modest increases in the St. Louis area but trailing behind the residential market. Kansas City, on the other hand, saw its commercial construction deemed weak overall. Commercial real estate agents remained optimistic, though, buoyed by the increase in absorption rates. In Coldwell Banker Commercial's Midwestern U.S. Market Trends and Forecast, St. Louis shone in the job-creation category, with a gain of 3.3%, or 42,900 jobs, while Kansas City reported a 1.3% gain. This increase affected the industrial real estate section, with a 7.3% vacancy in St. Louis, down from 8.3% a year earlier. The decreased vacancy levels in St. Louis beat the Midwest range, which ranged approximately from 9% to 12%. The retail real estate market reflected the job-creation gain, with St. Louis coming in second after Chicago, with 186,000 square feet of space built. Net absorption of retail space dampened the picture slightly, though, with St. Louis erasing the gains it made in the previous quarter by posting a minus 120,000-square-foot absorption. The negative absorption impacted the cost per square foot, with St. Louis called a "laggard" with its 0.8% rental loss. As to the office real estate market, the Coldwell Banker report observed: "While the performance of absorption throughout the region during the latest quarter, at 2.7 million square feet, trailed the completion volume by about half a million, it was a striking turnaround from the negative 532,000 recorded the previous quarter," the report said. "For the year as a whole, net absorption of 1.9 million square feet was greatly exceeded by 5.2 million in new deliveries. Vacancy, accordingly, has increased: at 18.9%, the year-end average showed no change from a quarter earlier but was up 20 basis points over 12 months and remains the highest in the nation."
The vacancy rate declined to an average of 16% in Q1 from 16.2% in the previous quarter. It was the fourth-straight quarterly decline. Absorption slowed in the quarter to 10.1 million square feet, down from 20.1 million square feet in the fourth quarter. It was the sixth-consecutive quarter of positive absorption. The number was up significantly from the 1.2 million square feet absorbed in Q1-04 and the minus 7.1 million square feet two years ago. The rent increase was the first since Q1-01, just before the bottom dropped out of the office market, sending it into one of the worst downturns in history. At one point a year and a half ago, absorption was negative for 12 out of 13 quarters, an unprecedented collapse in demand during which companies vacated 160 million square feet more than they occupied in a total market of about 3.5 billion square feet. Even with last quarter's increase, rents are still 20% below their peak of $25.34 a square foot four years ago. In more good news for landlords, new-building completions remain very low. Just 4.8 million square feet of new buildings opened in Q1, well below the 44.2 million square feet opened in the most-recent peak, Q4-01. In individual markets, Washington, D.C., continued to be the best-performing area in the country, with a vacancy rate of 7.5%, more than two percentage points lower than the two other best markets, San Bernardino, Calif., and New York. Dallas continued to be the worst market by far. Vacancies there were 25.6% in Q1. Columbus, Ohio, was second worst with vacancies at 21.9%. Richmond, Va., continued to see its office market improve. Rents there jumped 1.8%, which tied it with Nashville for the biggest increase in Q1. Meanwhile, the hot Southern California markets remain so. Orange County rents went up 1.7%, while Los Angeles rents were up 1.5%. Minneapolis and San Jose performed worst. Rents in both markets fell 1.3%.
Cushman said an improving economy has fueled increasing demand from companies looking to move into or expand in New York City, indicated in part by strong sales activity. Two examples in particular were Citigroup's purchase of 176,000 square feet at 731 Lexington Ave. and Bank of America's acquisition of 171,049 square feet at 50 Rockefeller Plaza. "Basically, what you have now is very strong leasing activity and the amount of supply has started to stabilize and in fact decrease," said Ken Krasnow, a Cushman executive managing director. "Financial services and law firms, in particular, have very strong record profits on Wall Street." The hottest area was Midtown, where 50% of Manhattan's leasing activity took place, the report said. Midtown rents averaged $47.13 a square foot, up from $45.98 last quarter, and its vacancy rate fell to 9.8%, the lowest since June 2002. Cushman said it expects a record year, with more than 50 tenants in the market each looking for at least 100,000 square feet, as companies look for more space while supply continues to shrink. Cushman & Wakefield's findings were similar to those Newmark, even though that firm found that the average rent had decreased slightly. Newmark's quarterly market analysis showed average rents decreasing in the same period to $40.02/sq ft, from $41.28 at the end of 04, which brought Newmark's average rent figure for Q1 close to Cushman's $40.28. Kovid Saxena, Newmark's director of research, said that during the past 12 months, rents have been steadily increasing and that this quarter's slight dip does not signal market weakness. He said that, besides looking at the rent, it's important to consider availability rates, which refer to property that is on the market, including space that will be available in the next 12 months. Newmark said availability rates decreased to 12.1% from 12.4% at the end of 2004, a sign of improvement.
The best-performing apartment REITs in recent quarters have been in hot housing markets. Essex and Archstone-Smith, which have large amounts of their portfolios in Southern California and Washington, D.C., have posted strong operating results quarter after quarter in recent years. REITs more focused on tepid housing markets have suffered. The national apartment-vacancy rate rose to an average of 6.7% in 2004 from 3.1% in 2000. While some expect this trend to continue, others worry that housing prices could fall in some of the more speculative markets, forcing people who bought houses as investments to try to rent them out. That added supply could hurt the very apartment owners that benefited from the boom. To help sort through this, Merrill Lynch published its first REIT Housing Affordability Ranking Study to assess apartment REITs in terms of concentration in the most expensive housing markets. The logic, according to Merrill REIT analyst Steve Sakwa, is simple: It is best to own apartments where homes are least affordable. As home price and mortgage rates rise, the thinking goes, more people will be forced to rent. The REITs that ranked the best were Essex, BRE, AvalonBay, and Archstone-Smith. Essex and BRE had 79% and 76% weightings in California; AvalonBay had significant weightings in California and the New York area; and Archstone-Smith benefited with a 39% weighting in the Washington, D.C., area. "We think over a longer period of time, these companies will deliver higher top-line growth," Mr. Sakwa says. Merrill intends to publish new rankings every quarter. Depending on one's take of the housing market, the rankings can be useful in picking apartment REITs likely to benefit as long as the housing market keeps humming or in picking REITs more vulnerable to a housing bubble bursting. "Even though [REITs in low home affordability markets] have the potential for increasing rents, there is also the risk a bursting bubble would also be reflected in rental performance in those markets," says Gleb Nechayev, senior economist with real-estate research firm Torto Wheaton Research. Sherry Rexroad, managing director with Radnor, Pa.-based ING Clarion Real Estate Securities LP, which has $6.3 billion in managed assets, is worried about the condo market. "It is creating hot spots. Not individual buyers buying to own but speculators buying to then flip. I worry those units will come back to the rental market and create problems for the rental-apartment market." But now, some say, the apartment REITs that could move up to the winners' category aren't necessarily in markets where homes are hard to afford. Instead, they are in recovering markets where there has been stronger-than-expected job and population growth, such as Austin; Atlanta; Charlotte, N.C.; Dallas; and Phoenix. Ms. Rexroad says her focus is on REITs that are in markets with strong job growth and that have development pipelines in markets with constraints on new construction, which limits competition and oversupply. She says companies such as AvalonBay, Camden Property Trust, and United Dominion Realty Trust are where "we will start to see the outperformance." Some of that is because they are in higher job-growth markets, she says. But she adds that their development capabilities in supply-constrained markets allow those REITs to get higher yields than REITs that are acquiring assets at rich prices.
The number of new leases signed and the increase in rents in Q1 mark the apartment industry's strongest performances in those categories since 2001, when the rental market began its slide. The national apartment vacancy rate rose to an average of 6.7% in 2004 from 3.1% in 2000. Tenants occupied 8,334 additional apartment units in Q1, up from a gain of 7,737 units in Q4. In the year-ago first quarter, the number of occupied units declined by 17,559 units. "While absorption [during Q1] may seem modest, it's important to remember that the apartment market has been plagued by negative absorption during the first quarter of each of the past few years," says Lloyd Lynford, chief executive of Reis. "Coupled with effective rent growth of 0.6%, [the results] represent good news." Local apartment markets that experienced the greatest declines in vacancy rates from the fourth quarter to the first quarter, according to Reis, included Palm Beach, Fla., with a decline to 5.9% from 7.3%; Wichita, Kan., with a decline to 8.9% from 9.7%; Orlando, Fla., with a decline to 6.1% from 6.7%; Tucson, Ariz., to 7% from 7.6%; and Tampa-St. Petersburg, to 6.9% from 7.5%. Markets that saw the greatest increases in vacancy rates included Sacramento, Calif., to 6.9% from 6.4%; Indianapolis, to 10.7% from 10.2%; Albuquerque, N.M., to 7.8% from 7.2%; Birmingham, Ala., to 5.1% from 4.3%; and Fort Worth, Texas, to 11.1% from 10.2%. Palm Beach, Fla.; Las Vegas; San Bernardino, Calif.; Jacksonville, Fla., and Norfolk, Va., were among the markets that saw rent rise above 1% during the first quarter. The apartment market was helped somewhat by improving job growth as well as rising home prices, which, with slightly higher mortgage rates, made purchasing more difficult for some renters. This could be a sign that home prices have overreached in some markets. But the apartment-rental business is by no means out of the woods. One wild card is all of the condo construction and condo conversion taking place throughout the country, since an estimated one-third of condo units are rented out. Reis doesn't track such rentals. "A meaningful portion of condos are going to be in the rental pool and do represent competition for a rental apartment," says G. Ronald Witten, president of Witten Advisors LLC, a Dallas-based apartment investment advisory firm. What's more, he adds, unsold condo units may go back into the rental pool, further adding to supply.
"Landlords seem to be doing their share as well," said the report. "Increases in asking rents have been kept to minimal sub-inflationary levels. The 2.3% increase in the average asking price in St. Louis over the last 12 months was the greatest - by a wide margin; regional effective rents increased only 1.3% on average over the same span. "For the region as a whole, the flatness of the average effective rent at $733 per month during Q4 was the nation's weakest performance; it is also the nation's lowest price," added the report. "The effective average rent was up only 0.4% from year-end 2003, again the nation's smallest gain. Growth in asking prices has been commensurately weak. The best rental performance for fourth quarter belongs to Indianapolis, where average asking and effective rates increased 0.8% and 0.9%."
The local apartment market has been weakened by the recession and several years of widespread building. Recently, though, demand for rental units has improved. Net leasing totaled 3,380 units in Q1 – substantially more than the 1,338 new apartments added to the market. But for the last 12 months, developers in North Texas have built about 50% more apartments than they have leased. And construction is picking up. "After it looked like developers might be getting ready to take a breather, starts kicked up again," Mr. Willett said. "Total product under construction climbed back over the 10,000-unit mark to 10,780 units." Most of the building is focused on central Dallas and the Las Colinas market, he said. Currently, occupancy levels are high in those neighborhoods. The occupancy rate in central Dallas is 93.7%, and the rate in Las Colinas is 94.9%. Overall apartment rents in Dallas-Fort Worth were down slightly in Q1 to an average of $688. "Looking ahead, it looks like overall progress will only be made in inches," Mr. Willett said. "The momentum registering in many other markets just isn't there in Dallas-Fort Worth."
Apartment rents have risen steadily since 2001 in the Washington area along with an improving economy and job growth. The average rent for an apartment in the Washington area is $1,255 per month, compared with $865 nationwide, according to Delta Associates. Rents in the Washington area increased an average 4.9% last year. Meanwhile, renters moved into about 5,500 apartments in the Washington area. "That is more than any other major city in the country," Mr. Singer said. "That's almost one in every 10 apartments in the country came from this [metropolitan area]." Compared with the costs to own a home, apartment living can be a good deal in the Washington area compared with other cities. In the Washington area, renters paid about 59% as much as they would for home mortgage payments last year, according to Torto Wheaton Research, a real estate market research firm. In Atlanta, they paid 92% as much to rent as to own a home. In New York, renters paid an average of 71% as much as homeowners.
Most notable was Morgan Stanley's U.S. Real Estate Investing division. According to a report from the National Multi Housing Council, an apartment trade group based in Washington, D.C., Morgan Stanley bought 46,473 apartment units last year, boosting the size of its portfolio by 87%. That made Morgan Stanley one of the top 10 owners of apartments, ranking seventh, up from 12 the prior year. Morgan Stanley spent 2004 acquiring apartment assets mostly in "opportunistic" or "value-added deals," as they are known in the industry. "We had been selectively buying core investments but found that difficult given the high prices," says Dave Hardman, U.S. head of real-estate investing at Morgan Stanley. Last year Morgan Stanley bought lower-quality "very opportunistic" assets, and entered into joint ventures to develop apartment properties, he says. The U.S. apartment market was hurt by low mortgage rates turning some would-be renters into home buyers, a weak job market that cooled tenant demand and oversupply in some areas. The national apartment vacancy rate rose to an average of 6.7% in 2004 from 3.1% in 2000, according to Reis. In recent months, average rents and occupancies have been rising slightly in some areas. It appears more firms are making bets on a recovery in the rental-apartment market this year. As of the end of February, apartment deal volume totaled about $3.53 billion, up from $2.86 billion in Q4, according to Real Capital Analytics. Just last week an investment company controlled by the ruler of the Persian Gulf emirate of Dubai agreed to buy 21,000 rental apartments in the Sunbelt for $1 billion, the largest acquisition of apartment buildings in the U.S. in four years. Morgan Stanley's Mr. Hardman says the firm is bullish on the apartment sector for this year and the next few years to come. "We see the demographics at work as the echo boomers start their household formation years and generally are renters versus homeowners and as job growth improves," he says, referring to the children of baby boomers. Mr. Hardman also says the firm believes higher mortgage rates and rising prices will cool home buying. "We think there'll be a return to rental versus home ownership," he said. Many REITs decided not to wait around for the market to improve. As a result, last year apartment REITs owned 31% of the apartments owned by the top 50 owners of apartments in the U.S., down from their peak of 35% in 2003 and the lowest level since 1998. Instead, private investors, including condo converters, took advantage of historically low interest rates, leveraged up and gained buying power. "It was not difficult for any private investor to leverage up to 70% to 80%," says Yougou Liang, managing director of research at Prudential Real Estate Investors. "All institutional investors have a hard time matching that," as they have to be mindful of shareholders and credit-ratings companies. The biggest owners of apartments: [1] CharterMac Apartment Investment and Management; [2] Equity Residential; [3] MMA Financial; [4] SunAmerica Affordable Housing Partners; [5] Boston Capital; [6] Morgan Stanley; [7] United Dominion Realty Trust; [8] Archstone-Smith; [9] Lefrak Organization. [Source: National Multi Housing Council] Rating Agency Updates Fitch Ratings has downgraded and removed from Rating Watch Negative the following ratings for General Growth Properties, and its subsidiaries: Senior unsecured issuer to 'BB' from 'BB+'; and Preferred stock shelf to 'B+' from 'BB'. The Rating Outlook for GGP and its subsidiaries is now Stable. Approximately $8.4 billion of debt is affected by Fitch's action. The lowering of GGP's senior unsecured and preferred stock rating principally reflects the company's aggressive capitalization and unencumbered asset strategy following its acquisition of Rouse. GGP's leverage, defined as total debt divided by total undepreciated book capital, increased to 81.69% at 12-31-04 from its historical range of 55% to 65%. This concern is partially offset by management's commitment to reduce leverage towards its historical range through the sale of non-core properties as well as issuance of equity. Nevertheless, Fitch expects that the company's leverage will remain above 70% for the foreseeable future. The Rouse acquisition also added approximately $2 billion of development in progress and land assets to the company, which Fitch generally believes are less leverageable than traditional fully leased operating properties. The ratings assume a decline in leverage over the next 12 to 18 months based on GAAP measures. Fitch would revisit its Rating Outlook for GGP absent favorable movement in GAAP leverage metrics in this time period. Another concern centers on the company's financing strategy. GGP has announced that it may refinance its unsecured bank facilities in part by placing mortgages on existing unencumbered properties, and increasing leverage on existing encumbered properties. In Fitch's view, this strategy limits the company's financial and, to a lesser degree, operational flexibility. On a consolidated basis, Fitch estimates that GGP has less than $1 billion of unencumbered operating properties at gross book value supporting over $8 billion of unsecured debt. In addition, the high volume of recently acquired assets in combination with its aggressive capitalization exposes the company to substantial market risk. Over 50% of the company's assets have been constructed or acquired within the last two years - a period of exceptional appreciation for commercial real estate assets. These assets are now reflected on GGP's balance sheet with book value reflecting asset prices at or near peak valuations. Although Fitch does not expect a sharp correction in the retail real estate market or a significant downturn in consumer retail spending in the near term, this may leave the company more vulnerable to changing economic conditions over time than other REITs. Partially offsetting these concerns is the company's size, tenant diversity, property quality, and long history of demonstrating solid financial results. GGP is now the largest equity REIT by undepreciated book asset value. In addition, the company's largest tenant contributes less than 2.8% of total net operating income and the largest tenants represent well known, and in some cases investment-grade rated retailers. The Rouse acquisition increased the company's total portfolio to 221 managed retail properties spread across 42 states. In Fitch's view, this creates a highly diverse, robust cash flow stream that helps to insulate the company from regional economic volatility. Fitch views GGP's property management expertise and broad relationship network as core strengths. The company is believed to have broad and deep relationships with many of America's major retailers contributing to strong property level performance. The company also leverages its expertise to actively manage and continually update its retail properties, which has ultimately been reflected in strong lease renewals and re-leasing spreads. Same store net operating income improvements were 4.3% in 2004 and 3.8% in 2003, both of which were at or near the top of the company's peer group. The notching applied to the Price unsecured debt, which at 'BB+' one notch higher than the 'BB' GGP issuer rating, reflects the strength of the bond covenants requiring unencumbered asset coverage of 150% of unsecured debt as well as the short maturity and annual repayment schedule of the bonds resulting in high repayment visibility. The two notch lowering of the preferred stock shelf rating is also reflective of higher leverage levels and Fitch's view that a significant portion of the book value of the company's portfolio currently reflects peak market valuations. Fitch believes this would impact subordinated instruments, particularly from a recovery standpoint, to a greater degree than senior obligations. Fitch Rates DDR's Sr Unsecured Note Offering 'BBB-' press release 4-28 Fitch Rates DDR's $400 million offering of senior unsecured notes 'BBB-'. The rating is consistent with DDR's existing senior unsecured obligations. The Rating Outlook is Stable. DDR's offering comprises $200 million of five-year 5.0% senior unsecured notes and $200 million of 10-year 5.5% senior unsecured notes. The transaction is leverage neutral as proceeds will be used to repay existing indebtedness, including outstandings on the company's $1 billion unsecured revolving credit facility. Fitch views the transaction favorably as it will both modestly extend the company's weighted average debt maturity and increase the component of fixed-rate financing. Rating strengths are centered on DDR's portfolio of high quality open-air shopping centers. The property portfolio contains a well diversified lease base with no single tenant comprising more than 4.5% of aggregate base rents. Typical properties feature strong necessity-based anchor tenants and often include Wal-Mart, Kohl's, or Target. As of 12-31-04, managed occupancy was strong at 94.7%, up modestly from 94.3% in 03. Although the weighted average lease rate for the company's retail space declined modestly in 2004, this was largely attributable to new acquisitions. However, SSNOI increased by 1.5% on a year-over-year basis. Other strengths are centered in the company's solid interest and fixed-charge coverage ratios for its rating category. In 2004, operating EBITDA (excluding gains on sale and partnership income) divided by total interest expense was 3.1 times, which compares well with the historical range over the past three years of 2.6x to 3.5x. In addition, while the company continues to make significant use of unconsolidated partnerships, the component of on-balance sheet equity investments in joint ventures has declined to just 5.2% of total assets at 12-31-04 from 10.3% at 12-31-01. Construction and land investments, which Fitch views as less leveragable than developed operating properties, remain a significant part of the company's operating strategy. Still, these investments have also declined modestly in proportion to the company's asset base on a year-over-year basis to 4.4% at 12-31-04. DDR has shown effectiveness at digesting its significant acquisitions over the past five years. DDR's asset growth rate has been high over the past five years. Although experiencing a compound annual growth rate of 24.4% since 2000, property valuation concerns are somewhat mitigated as a meaningful portion of new assets are reflected on balance sheet at construction cost rather than market value. DDR's leverage declined in 2004, with debt to undepreciated book capital declining to 46.1% at 12- 31-04 from 49.6% at 12-31-03. Principally as a result of indebtedness raised and assumed from the addition of $1.15 billion of retail space in Puerto Rico, Fitch estimates that leverage increased to near 51% as of 12-28-05. This level continues to be adequate for the rating level. Fitch Rates Health Care Property Investors' Sr Notes 'BBB+' press release 4-27 Fitch Ratings has assigned a 'BBB+' rating to a recent offering of $250 million 5.625% 12-year senior unsecured notes issued by HCP. Proceeds will primarily be used to repay outstanding variable rate line balances on the company's unsecured bank credit facility. The Rating Outlook is Stable. The 'BBB+' rating continues to reflect favorably on HCP's long operating history, its capable and seasoned management team, and balanced investment strategy with investments in medical office buildings (27% of invested capital at book value), assisted living facilities and continuing care retirement communities (26%), acute care hospitals (22%), and skilled nursing facilities (20%). Additionally, Fitch views positively the company's debt service coverage measuring greater than 3.0 times for the last two years and its manageable use of debt leverage at 41.7% of undepreciated book capital as of Dec. 31, 2004. Pro forma this offering, the company's debt service coverage ratio for year-end 2004 drops slightly to 3.6x from the pre-offering-calculated 3.9x. The decrease in coverage is a result of converting $250 million of debt from an approximate 3.14% variable rate to a 5.63% fixed rate. This coverage metric continues to be adequate for the rating category. This transaction significantly reduces the company's exposure to variable rate debt and terms out line of credit borrowings with long-term debt, which Fitch views as a credit positive. The company's debt leverage as of Dec. 31, 2004 was 41.7% of undepreciated book capital. Including preferred stock, debt leverage plus preferred equals 49.7% of undepreciated book, in line with the company's three-year average. HCP is a $3.6 billion (undepreciated book capital) REIT with a well-diversified portfolio of 527 properties in 43 states. The company's largest single operator is Tenet, representing 14% of HCP's operating income, followed by American Retirement at 13%. Quick Facts Private local real-estate investors as a group were the biggest net sellers of property last year, selling off about $4.5 billion more than they purchased, according to Real Capital Analytics. Their aggressive selling spree began about a year ago, shortly after interest rates began rising last April, and continues today. Real Capital President Robert White Jr. says he can tell whether a market has gotten overheated by paying attention to these investors. "They're not motivated by fees or allocations and they're very entrepreneurial," he says. "They have total freedom to invest across property types and markets and traditionally have led the market." (Sheila Muto, WSJ 4-06) The American Stock Exchange, home of most U.S. ETFs, said short interest in the StreetTracks Wilshire REIT fund represented 57.2% of total shares outstanding, and 124.6% for iShares Dow Jones U.S. Real Estate as of mid-April. Meanwhile, short interest for individual U.S. stocks averages about 2%. (John Spence, Marketwatch 4-27) More REIT Links News Links
Update: Fourth Experiment in Stock Picking 4-29-05 A less than sector balanced portfolio is compared with the average of two REIT index ETF's: ICF [Cohen & Steers Realty Majors - the top 30 REITs by market cap] and RWR [the REIT Wilshire Index]. The first experiment went from Nov 02 to Oct 03, the second experiment went from May 03 to May 04 and the third experiment went from Jan 04 to Dec 04. This experiment has a shift towards being over weighted in Office and having two key holdings - MLS and VNO - and being over weighted on growth REITs [MLS, VNO, ARE and OFC] and under weight on value [like HR, CRE, HME and UDR]. This experimental portfolio starts off with a possible disadvantage - both MLS [at 7.41%] and UDR [at 7.87%] had large gains in December [and thus stretched valuations] just prior to the start of these stats. It is probably true that valuations were stretched all year. And four of these stocks [MLS at 50.72%, DDR at 38.25%, VNO at 44.24% and OFC at 44.62%] notably out-performed the ETF's and REIT sector fund average of 32%. So I might expect to give back some [but not all] of 2004's 300 basis point out-performance of this portfolio. Note that this portfolio, while being weighted toward higher growth and lowering yielding REITs, still pays a dividend of $785 per quarter vs. RWR's $655 and ICF's $562. This experiment, unlike the others, will not last a year - as planned additions to the portfolio will come in late spring and summer. Leading candidates for admission at this time are: [1] Mall REIT SPG; [2] more shares in Retail: CARS [200 more purchased 4-21], maybe CDR [GARP] or more DDR [growth]; [3] Apts MAA [value] and more UDR [value]; [4] Office KRC [growth], maybe PKY [value]; [5] Health Care LTC or WRS [high growth, high yield, low Price/FFO]. My top three holdings represented right at 50% of the total portfolio - and I want to get this percentage down. At the same time, I plan to add to the existing portfolio of MLP/Energy stocks [currently ETP, EDP and XOM] shares in MMP [strong distribution growth history with good future prospects] and VLI [growth]. This gives me a larger menu than budget. But my research will weed out some, because I still lack sufficient knowledge about those I do not yet own. Earnings Guidance & Dividend Changes: OFC gave 05 FFO guidance of $1.78 - $1.85 per diluted share in their Q4 conference call on 2-10-05. The current consensus estimate is $1.84. United Dominion Realty Trust on 2-16 announced a 2.6% increase in its common stock dividend for 2005 to $1.20 per share. This is the Company's 29th consecutive year of dividend increases. ARE on 2-14 updated its 2005 earnings guidance, based on the Company's current view of existing market conditions, to an FFO of $4.78 [vs a current consensus of $4.80] and Net income per common share (diluted) of $2.56. On 3-18, ARE kept the div at 66 - cents payable on April 15 [no div in Q1?]. During 2004, the Company had an aggregate dividend increase of 14%. Yet we continue to maintain a very conservative payout ratio of approximately 55.6% as of December 31, 2004, which is among the lowest in the REIT industry," said Joel S. Marcus, CEO of Alexandria. AMB on 3-01 declared a regular cash dividend for the quarter ending March 31, 2005 of $0.44 per common share. The dividend reflects an annual indicated rate of $1.76 per common share, an increase of 3.5% over the 2004 annual dividend rate of $1.70 per common share. On 4-12 CARS announced that it raised the company's quarterly dividend to 43.8 cents per share, payable on May 20 to shareholders of record as of May 10. HR on 4-26 announced its forty-seventh consecutive common stock dividend increase. This dividend, in the amount of $0.655 per share, represents an increase of $0.005 per share. The dividend is payable on June 2, 2005 to shareholders of record on May 16, 2005. At this rate, quarterly dividends approximate an annualized dividend payment of $2.62 per share.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||