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Today, RREEF, an arm of Deutsche Bank's Deutsche Asset Management, is expected to announce the acquisition of an industrial portfolio totaling about 23 million square feet in 18 U.S. markets for $1.3 billion. The transaction comes on the heels of another big industrial real-estate deal earlier this month. ProLogis bought Catellus for $3.6 billion in the largest real-estate deal of the year. ING Clarion Partners also has been busy buying industrial real estate. In April, it bought a portfolio of 7.1 million square feet of industrial properties in Seattle, Portland, Ore., Northern California, San Diego, Phoenix and Dallas for about $474 million. Since 2004, ING Clarion has bought nearly 250 industrial properties with a total purchase price of $1.6 billion. "There's definitely demand for industrial real estate, especially institutional-grade real estate," says Dan Fasulo, director of market analysis at Real Capital Analytics. One reason, he says: "an improving economy generates more demand for industrial real estate on the leasing side." What's more, for investors, there are higher rates of return available in industrial real estate than the other core property types, Mr. Fasulo says. As of the beginning of June, the average rate of return on industrial properties was 7.9%, compared with 7.6% for office, 7.5% for retail, and 6.5% for apartments, according to Real Capital Analytics.
Fitch is taking a cautious view of condo-conversion loans. "Fitch believes that they are riskier than traditional CMBS loans, particularly given the fact that the loans have an element of construction risk," Treanor said. When properties are converted to residential condos, the projects face construction risks related to unforeseen delays and cost overruns "as we've seen in markets such as New York City and Miami," said Treanor. Conversion projects that pose the lowest risk are recently constructed apartment buildings that require only cosmetic changes, such as painting and carpeting, to convert them into condos. Higher-risk projects include office and hotel properties that require a significant amount of re-construction to convert them into condos. Condo-conversion projects also face timing and market-condition risks. Those awaiting government approvals face potential delays, which pose risk. "The time to receive an approval in NYC has doubled from three to six months due to an increase in conversion applications," she said. The delays can cause construction costs to soar and make it trickier to predict market demand when the project is completed. Condo conversions have become particularly "overheated" in South Florida, New York and Las Vegas, she said. "Due to these risks, Fitch believes approximately 10% of all condo-conversion loans that are originated this year will default," said Treanor. To mitigate the risks, Treanor believes the loan should be paid off in full before any money is returned to the developer.
Other REITs with exposure to Winn-Dixie stores include Equity One Inc. (EQY), Regency Centers Corp. (REG), Kimco Realty Corp. (KIM), Kite Realty Group Trust (KRG), Ramco-Gershenson Properties Trust (RPT), and Weingarten Realty Investors (WRI). Equity One said two of its 16 stores are affected by the closings. These stores affect 0.3% of the company's total base rent. Kite and Ramco both have two Winn Dixie stores in their portfolios, but executives said none are affected by the closures. None of Weingarten's four Winn-Dixie stores will be impacted, according to Banc of America analyst Ross Nussbaum. A Kimco spokesman was not immediately available to disclose how many of its Winn Dixie stores could be affected. A number of other shopping center REITs, including Cedar Shopping Centers (CDR), Pan Pacific (PNP) and Federal Realty (FRT), do not have any Winn Dixie stores in their portfolios.
"A banner year used to be in the $10 billion range," said Scott Latham, an executive director of Cushman & Wakefield. "Last year, we were 50% above that." The company estimates that $12.67 billion of property was sold through mid-June. If current trends continue, 2005 will far exceed last year's total. In recent years, real estate executives have talked about the incongruity of the exceptionally high sales prices for office buildings and the soft rental rates for space within such buildings. But now office rents in Midtown Manhattan have recovered almost to the peak levels of early 2001, providing some rationale for the lofty sales prices. "The leasing market started to turn in November 2003, and 2004 was a very strong year," said John Powers, co-chairman for the tristate region at CB Richard Ellis. "For the year to date, we are still ahead of the five-year average" of square feet leased, he said. Even though institutions have become an important factor in real estate investing, many executives say private investors with access to cheap debt still dominate in Manhattan. "Last year, 68% of the sales volume went to private investors," Cushman & Wakefield's Mr. Latham said. Part of the reason, he said, is that private investors are willing to take on more debt to make a purchase than are institutions, which tend to have stricter rules about financing acquisitions. "A private investor can finance 80% of a deal, compared to 60% to 65% for institutions," Mr. Latham said. At the Toy Center, the connected buildings at 200 Fifth Avenue and 1107 Broadway that have housed offices and showrooms for toy manufacturers, the competition to acquire the property was fierce. "When we went to sell the Toy Center, we had over 20 real bids, which is a remarkable number by historic criteria," said Anthony E. Malkin, president of W&M Properties, a large investor. Mr. Malkin said most of the bidders were individuals based in New York. "This market is being driven by entrepreneurial capital with access to high levels of debt," he said. The Toy Center was sold for $355 million to the Chetrit Group. There has been speculation that the buildings, which face Madison Square Park, will be converted into residential condominiums, but Chetrit has declined to disclose its intentions. Leasing brokers say that in Midtown, concessions packages - periods of free rent and contributions toward interior construction - shrank as the vacancy rate dropped to 10.3% in May from 12.3% a year earlier, increasing the effective rent. According to a Studley study, the average effective rent in Midtown by the end of last year was $66.27 a square foot, which was still 11% below the high of $74.54 set in early 2001. The effective rent as calculated by Studley includes operating expenses, real estate taxes and the cost of electrical power, making it higher than the nominal base rent. Barry M. Gosin, the chief executive of Newmark & Company Real Estate, said, "The market is being pulled up from the top," with some prospective tenants willing to pay very high prices for space that meets their needs. "Financial institutions like hedge funds have set the bar very high in prime buildings in the Plaza District," an area north of Grand Central. Because these companies were willing to pay high rents for the space they wanted, other landlords lifted their asking prices as well. But if the Midtown leasing market is finally recovering from the slump after the Sept. 11 attacks, the downtown market is not. The vacancy rate there was 16.3 percent in May, compared with 15.2 percent a year earlier, according to CB Richard Ellis. The rebuilding of 7 World Trade Center is expected to be completed early next year, but no tenants have yet signed up for its 1.7 million square feet. "Downtown is basically stagnant, although the conversion of office buildings to residential use will eventually be good for the area," Newmark's Mr. Gosin said. He noted that the gap between the Midtown rental rates and those downtown has widened, as few office tenants have taken space downtown. "The difference used to be something like $15 to $20 a square foot," he said. "Now, it is more like $30 a square foot." Some real estate executives said the decision by the investment banking company Goldman Sachs, the only firm that had committed to building a new office tower near Ground Zero, to suspend its plans was discouraging other tenants from looking for space downtown. "Unfortunately for the city, the impact of Goldman will be far-reaching," Mr. Steir of Studley said.
On Tuesday, Morgan Stanley raised its rating on Cousins, Macerich and Ps Business Parks (PSB) to overweight from equal weight, and it lifted Archstone Smith to equal weight from underweight. The Morgan analysts downgraded Developers Diversified, Regency Centers and Taubman to equal weight from overweight, while trimming Apartment Investment, Affordable Residential Communities and and Highwoods Properties to underweight from equal weight. The analysts noted that valuations continue to rise for REITs despite the bearish stance of many on Wall Street. "We believe these exalted real estate asset valuations and the impact on the stocks is not sustainable in the long run," they said. And they said that despite a recent rally in bonds that has sent rates back down, they believe rate gains are likelier than further declines. The analysts remain generally positive on their outlook for mall and industrial REITS, while taking a negative view of the multifamily, storage and manufactured-housing subsectors. "Despite the continued strong showing by the malls, their valuations have merely tracked earnings growth," they wrote. On the flip side, they said the trend toward condominium conversions and the run-up in prices for residential units has led to unsustainable valuations for apartment REITS.
"They often have massive parking lots" that can be redeveloped, said Dean Adler, a principal and co-founder at Lubert-Adler Management, whose funds manage $8 billion in real estate assets. "Transportation arteries are there. There's shopping there. They're usually the hub. There's a huge opportunity" he said. Opportunity fund executives and housing experts say land and inventory shortages have made mall properties a hot commodity for residential developers and homebuyers. Condos next to malls have become trendy. Several mall REITs, such as GGP and Simon, have a number of such redevelopments underway. Low interest rates, a hot housing market and favorable demographics prompted GGP to start looking at the idea about two years ago. And Chief Executive John Bucksbaum said plans are drawn up to construct residential buildings on at least half a dozen of the company's mall properties. "We've just broken ground on our first one," which will be located in Hawaii, Bucksbaum said. Other markets being studied include a Boston suburb and Alexandria, Va. "They (the housing units) could be either for sale or for rent." "We know that certain markets lend themselves well to residential and it's a good complement to the retail," said Bucksbaum. To date, General Growth is developing the residential properties itself, although Bucksbaum doesn't rule out selling some land parcels to developers or building condos jointly with a residential development partner, some of which have approached the company about such moves. "Absolutely," he said. "There's definitely interest from residential developers in our properties." Bucksbaum said the concept has been growing in popularity among homebuyers and renters. "As people age, the concept of live, work and play in a closer environment - versus having to spend hours commuting - is taking stronger hold on people, and it's becoming more appealing," Bucksbaum said. Simon has started including residential complexes as part of its masterplan developments, such as the St. John's Town Center in Jacksonville, Fla., and the Coconut Point Town Center in Bonita Springs, Fla., near Naples, both currently under development. The latter will feature residential units above the mall, as well as freestanding residential units adjacent to it. "In most of our new developments, we have apartments associated with them," said David Simon, CEO of Simon. He said the company is also reviewing its existing malls for residential development opportunities. "Malls have large tracts of land, and we're by and large in great locations," said Simon. "It's a good environment for a lot of residential and office use, and we're going through our process of evaluating it." He named Phipps Plaza in Atlanta and Copley Place in Boston as examples of sites where residential units can be added. He said his company is currently studying about 20 opportunities. Does Simon worry that people won't want to live next to a bustling mall? "There's a real demand there to do that. It's not going to be in every mall (though)." Simon has entered joint venture deals with residential developers to construct the apartments, although it doesn't rule out selling land to developers in some cases. "It's in its infancy," said Les Morris, a Simon spokesman. "We're looking at our properties and trying to see what avenues we can develop to make more for our shareholders and the company." He sees higher-than-average returns from this concept. Mallowners already own the land and have paid for the infrastructure, "so the returns ought to be very positive."
He estimates the weighting will drop 90 basis points in the Russell 2000 and 197 basis points in the 2000 Value Index. "Given the small weighting in the Russell 1000, we believe the net trading out of Russell 2000 is more notable - and negative - and will outweigh the positive shift in the Russell 1000 index," Whyte said. Under the plan, seven REITs and real estate operating companies will be added to the Russell 2000 - Agree (ADC), Boykin Lodging (BOY), First Potomac (FPO), Hersha Hospitality (HT), National Health (NHR), One Liberty (OLP) and Sizeler (SIZ). One company, Mission West Properties (MSW), will be deleted, and five real estate names - American Financial Realty (AFR), CarrAmerica {CRE), Essex (ESS), Healthcare Realty (HR), and Realty Income (O) - will move to the 1000 index.
Now, after more than five years of strong performance on Wall Street, a debate is raging over which group of investors is correctly valuing REITs and the real estate they own -- public or private. After struggling early in the year, REITs are up nearly 3% so far this year, while the Dow is down 2%. If REITs retain that lead, they would beat the market for the sixth straight year. REITs have gotten expensive by some measures, but when compared with the value of their underlying assets, they are trading at the lowest levels in years. What gives? REITs are trading at a 3% premium to the value of their underlying assets -- the buildings they own. Since 1993, that premium has been 7%, according to Green Street Advisors. On that basis, REITs look reasonably priced. That disconnect was debated formally and informally last week at the NAREIT 2005 institutional investor forum. Two big acquisitions of REITs at significant premiums to their stock prices just days before the conference began provided further fuel for the discussions. The consensus: There's no easy explanation but a lot of things are playing significant roles, including low interest rates, an abundance of capital, aggressively leveraged private investors, wariness of the stock market and more broadly, the economy, and the difference between how the private sector and Wall Street perceives the value of commercial real estate. Mike Kirby, principal of Green Street Advisors, noted the trend in a presentation, saying "the shocking thing about this is the extent to which net asset values have skyrocketed in the last three years. [Net asset values are] basically up anywhere from 70% to 80%." Mr. Kirby said the prices of real-estate assets keep rising, but because the income thrown off by these assets has been roughly flat, investors have essentially agreed to take lower returns on their money. That more than income growth has been driving values. Several attendees invoked ING Clarion's recent $1.6 billion acquisition of apartment REIT Gables Residential Trust as an illustration of some of the market dynamics at play. An ING Clarion partnership agreed to acquire Gables' common stock at a 14% premium to its previous day's closing share price. That deal is seen as an example of private investors valuing commercial real estate much higher than the public markets. "In our case, and maybe in the case of some others, there exists an arbitrage between what the private market value of the assets are and what the public valuations of the companies are," said Marvin Banks, Gables' chief financial officer, in an interview after the deal was announced. "About 90% of the capital that flows into the real-estate industry flows on the private market side." He said the private side is determining "the right valuation" for real-estate assets and companies. Others might disagree. GE Commercial Finance Real Estate, one of the nation's biggest real-estate investors, dropped out of the bidding for Gables, believing the price was too high. The other big deal was the purchase of Catellus by ProLogis for $3.6 billion this month. The deal between the two industrial REITs was done at a 16% premium, but Jeffrey Schwartz, ProLogis's CEO, said the price was worth it because of the value of Catellus's development team. Michael E. Pralle, president and chief executive of GE Commercial Finance Real Estate, cautioned that in this kind of environment, one has to "choose your battles carefully and recognize you will be paying full price today. ... If you want those assets, that's what you have to do."
While the top-two-performing funds over the past three years have made big bets on the shares of home builders, most real-estate funds have little exposure to single-family housing. Instead, they invest primarily in real-estate investment trusts that own commercial properties -- office buildings, shopping malls, hotels, apartment buildings -- and pass along the rental income they collect. Prices for commercial real estate and single-family housing "have acted quite differently at different times," says Steven Buller, manager of Fidelity Real Estate Investment Portfolio. Still, the question for holders of real-estate funds is also what comes next after a sharp run-up in prices: REITs no longer are available at the bargain prices of a few years ago, although some investors, including Mr. Buller, say they aren't overpriced. So far this year, real-estate funds haven't been stellar performers. After declining in the first quarter, they have rebounded to return an average 1.88% for 2005 through Wednesday, according to Morningstar. For the past 12 months, they have returned 32.46%. The category's performance tends to resemble that of REIT indexes. Anxiety about the residential-housing market escalated last week when the National Association of Realtors said resale prices of existing homes rose 15.1% in the 12 months through April, the sharpest one-year rise since 1980. More than half of the price increase occurred in the first four months of this year. CGM Realty, the No. 2 performer among real-estate funds over the past three years, with an average annual return of 32.03%, recently eliminated a position in home-building stocks that had been as large as 75% of portfolio assets in the second half of last year. Portfolio manager Ken Heebner explains that he sees "a very serious bubble" in the market for expensive homes, which some investors are buying without down payments and with interest-only financing. "We are seeing dangerous speculation that is going to lead to a severe price relapse in high-end homes" and potentially hurt the home-building stocks, he says. At Alpine U.S. Real Estate Equity Fund, the top performer over three years, with an average annual return of 34.43%, manager Sam Lieber says it isn't yet time to bail out of home-building stocks, which constitute about half of fund assets. While calling some local markets "frothy," he says he doesn't see the national housing market as overheated. He adds that the earnings prospects for home builders are still solid and their stocks still cheap relative to the broad stock market, although he allows that a change in investor sentiment could temporarily depress the stocks. Michael Winer, manager of Third Avenue Real Estate Value Fund, says he is "uncomfortable" paying current prices for many REITs because they exceed his estimates of the value of the properties the REITs own. Mr. Winer favors companies that develop real estate, rather than REITs. Mr. Heebner is slightly more bullish about REITs, which now constitute 72% of his fund's assets. "I can't tell you the outlook for these companies is exciting," he says. But in a low-interest-rate environment, he says REITs "are a very safe place for an investor to get moderate and growing income." He particularly likes REITs that own malls, which may be able to renegotiate expiring store leases at higher rates, and hotel REITs, which can benefit from limited new supply and strong demand for rooms. The average REIT's dividend yield as of Wednesday was 4.71%, according to SNL Financial. The average REIT is trading at 19.4 times estimated earnings for the next 12 months, versus a multiple of 15.5 for the S&P 500 -- the widest premium to the broad market ever, according to a report Wednesday by Green Street Advisors. (Green Street uses adjusted funds from operations as its earnings measure for REITs.) Some gauges of REIT value show the securities trading at as much as a 20% premium over the value of their properties. But a widely followed estimate by Green Street, puts the average REIT's premium at 4% above net asset value, below an average 7% over the past decade or so. Mr. Buller of Fidelity figures that REITs are trading near net asset values or at a premium of as much as 5% -- which he says is reasonable given their liquidity, professional management and built-in geographic diversification. Over the coming decade, he says, REIT returns are likely to average 7% to 9% a year.
Hotel REITs: These outfits are enjoying a recovery in business travel and conferences, while tourism has remained strong, pushing overall occupancy higher than year-ago levels. We believe the declining value of the dollar since last summer should bolster foreign tourism while keeping domestic travelers from venturing abroad. Most of the hotel REITs in our coverage universe reported that they have regained pricing power, posting an increase in revenue per available room between 7% and 12% in each of the past few quarters. We think an industry recovery continues and is gaining traction. We also think year-over-year comparisons will be relatively easy for the next several quarters. Overall, we think liquidity is improving, and many valuations are attractive, with most issues trading well below our estimates of net asset value (NAV). S&P has a 5 STARS (strong buy) ranking on only one dividend-paying lodging REIT: LaSalle Hotel Properties (LHO). We also have a 5-STARS ranking on one other non-dividend paying lodging company, La Quinta (LQI), whose stock trades as "paired shares" -- each unit consisting of one share of a REIT and one share of a "C" corporation operating company. Since divesting its non-lodging assets, the company has demonstrated industry leading revenue improvement due to its focus on updating its technology platform, expansion of its geographic footprint, and growth of its franchising program. Retail REITs: First-quarter results for this group generally exceeded our expectations. Earnings gains were robust, supported by what we see as solid fundamentals in shopping center portfolios. On average, occupancy levels and same-property net operating income rose. Rental rates on new leases and renewals continued to improve. We look for conditions to remain robust in 2005, buoyed by continued healthy consumer spending. We think retailer demand for more space, combined with limited new mall construction, should support additional rent increases. The retail REITs with 5 STARS recommendations from S&P are CBL, GGP, and SPG. Storage REITs: We believe an expanding U.S. economy should continue to stimulate increased demand for self-storage. As we see it, economic growth should lead to a pickup in hiring that will cause some people to relocate for new jobs, and these transitions often require the renting of storage space. None of the storage REITs we follow has a 5 STARS recommendation. Two are ranked 4 STARS (buy): Public Storage (PSA) and Sovran Self Storage (SSS). Health-Care REITs: The most recent quarterly results for these outfits, which operate hospitals and other health-care properties, were about what we expected. We think operating trends in the group will continue to improve slightly because of higher Medicare reimbursement rates. S&P has no strong buy recommendations on health-care REITs. Two are ranked buy: Health Care REIT (HCN) and Nationwide Health Properties (NHP).
"Foreign capital, especially German capital, is highly targeted to just a few markets" close to international airports, Mr. White says. Institutional investors end up focusing on the same markets because their "research-driven nature pushes them to invest in the best demographic areas," he said, adding that "institutions are loath to go into secondary and tertiary markets because they don't think the liquidity is there." As every real-estate broker knows, foreign buyers have always paid more than locals. But in the past year, foreigners, along with institutional investors, have paid still higher prices for properties in prime areas. The average price per square foot paid by foreign buyers for office properties rose 14% last year, while the average price paid by institutional investors rose 19%. By contrast, REITs and private, local investors are now paying less on average than they were a year ago. What is more, the average initial yield on office assets acquired by foreign buyers was 7.4%, below the 7.7% average for all office properties and slightly less than the 7.5% that institutional investors accepted. Meanwhile, many private local real-estate investors have been focusing primarily on office properties in suburban markets or markets outside of the top metropolitan areas, where competition for properties is less fierce. So far, that has been a smart move. Suburban office markets are improving more quickly than major metropolitan areas, according to real-estate brokerage firm Grubb & Ellis Co. Since the overall office-vacancy rate peaked in early 2004, the vacancy rate for office properties in suburban markets has fallen 2.2 percentage points, compared with the decline of 0.4 percentage point in downtown markets. The annual average asking rent for suburban office space increased 2.4% to $24.40 a square foot at the end of March from a year earlier. During the same period, the rental rate for office space in central business district locations declined slightly to nearly $35 a square foot.
And just as low interest rates helped retailers and retail estate over the past two or three years, higher rates will hit them hard on the way down. Homeowners will no longer be able to refinance and take money to the mall and that will hit the stores and the centers where they pay rent. “There’s no question that this spendable equity has driven retail,” he says. Green says he sees investors moving money into other real estate assets and suggests that multi-family might be a target. As the interest-rate environment changes and purchasing homes becomes more difficult, rental demand should grow, he figures. Green says he still sees opportunity in retail, but mostly in value-added situations. At today’s prices, it does not pay to purchase top-performing properties in top markets, because there is little chance of extracting higher value. So, he sees the action shifting to B and C properties. “With an A property, there’s nothing you need to do with it,” he says. Mike Myatt, executive managing director of Pacific Security Capital, a real estate investment bank, says he sees the shift in sentiment away from retail as well. “You’re going to see some asset class rotation at this point,” he says. “And, quite candidly, it’s probably good news.” How so? Myatt says it will help relieve the feeding frenzy, reduce upward pressure on prices and help cap rates move back to a more sustainable level. Like Green, he sees the action within retail shifting toward properties that need renovation, retenanting or even total repositioning. “It’s a much more brilliant play than buying stuff at compressed cap rates,” he says. Myatt sees money moving from retail into some office markets, as well as into hotels and industrial.
REITs are accustomed to growing by making accretive acquisitions of properties, portfolios and other companies. That works best when lower property values make it possible to grow earnings wholesale. But as cap rates have fallen and the cost of acquiring cash flow has risen, equity REITs have increased their appetite for partnerships and joint ventures as a way to increase both assets and income. At the same time, institutional and foreign investors, seeking entry points to the heated commercial marketplace have been only too happy to oblige. The most obliging of all the potential partners can be found in Australia, at least for now. Last week, it was reported that New York-based Reckson CEO Scott Rechler was Down Under scouting for an appropriate match. LA-based Maguire Properties announced that it is pursuing a joint venture there that could see the REIT sell an 80% stake in some properties to raise upwards of $1.5 billion. Maguire would retain 20% ownership, plus management and leasing fees, using the proceeds both for future growth and to pay down debt from its CommonWealth acquisition earlier this year. A Maguire deal would follow in the footsteps of Regency Centers’ joint venture acquisition with MacQuarie Countrywide of Australia of the $2.7 billion First Washington/CalPERS retail portfolio. Regency CFO Bruce Johnson notes that the deal is the largest of three Regency JVs; the other two are with CalSTERS ($127 million) and the State of Oregon ($483 million). Johnson values Regency’s stake in the MacQuarie partnership at 35%, or $1 billion. Johnson says Regency views the arrangement as an “efficient mechanism” that “allows us to increase our platform of properties. We can leverage our operating systems to provide more offerings for our customer tenants.” By acting as the agent for the joint venture, Regency also captures property and asset management fees and leasing commissions – real income in a large portfolio. “One of our goals is to increase fee income, and we have grown those significantly,” notes Johnson. One issue in moving forward with multiple partners, says Johnson, has the potential to cause conflict: future acquisitions. All three partners want to buy the same types of properties with their shared REIT paramour, so Regency has created a rotation system that basically offers deals to each JV partner in turn. On the institutional and foreign investor front, the reasons for signing up for a joint venture are equally compelling, notes a long-time real estate hedge fund manager, who asked not to be identified. “It’s a cheaper way for the investors to access properties,” he says. Both sides, he points out, “put up less money to control more property.” He foresees the trend as having the potential to help investors differentiate REITs with more power to grow. “When you think of how little money is in the hands of REITs and how much is in institutional hands, this could make for different tiers of REITs,” he says. For one thing, those companies with access to major institutional partners and foreign capital will be able to “reduce their need to go to the equity market.” What’s really behind all the hooking up? “Across the board,” he declares, “people want to be in the asset class.” S&P Puts Gables Residential Trust Rtgs On WatchNeg Dow Jones Newswires 6-08 Standard & Poor's Ratings Services today placed its ratings on Gables Residential Trust (Gables) and its operating partner, Gables Realty L.P., on CreditWatch with negative implications (see list). The rating actions affect $520 million of senior unsecured notes and $115 million of preferred stock. The rating actions follow the announcement that Gables has entered into a definitive agreement to be acquired by a partnership managed by ING Clarion Partners (ING Clarion) for $43.50 per share in cash, or roughly $2.8 billion, including $1.2 billion of assumed debt. The purchase price reflects a 14% premium over Gables' June 6, 2005, closing stock price and implies an approximate 5% capitalization rate. The transaction is expected to close in the third quarter of 2005 and is subject to shareholder approvals and other customary closing conditions. ING Clarion intends to operate Gables at higher leverage and secured debt levels, and it appears likely that ING Clarion will pursue a tender offer for the public bonds. In the event that the bonds are not redeemed, they would likely be downgraded, reflective of a more aggressive financial profile. The preferred securities contain no call provisions and are not callable until September 2006 ($40 million 7.875% series C) and May 2008 ($75 million 7.5% series D). If the preferred securities continue to be rated, the ratings would be lowered to a level below investment grade. It is possible that ING Clarion could attempt to tender for these securities also. Standard & Poor's will monitor this go-private transaction over the coming months. Fitch Affirms ProLogis On Catellus Buy Announcement Dow Jones Newswires 6-06 ProLogis' expected acquisition of Catellus appears to be a modest positive for ProLogis' ratings, according to Fitch Ratings, who affirms REIT as follows: --Senior unsecured debt 'BBB+'; --Preferred stock 'BBB'; --Rating Outlook Stable. Catellus has a track record as an experienced developer of industrial warehouse space and also has a high quality direct-owned portfolio a with strong occupancy rate and a very young average property age. These attributes, combined with significant presence in many key domestic industrial markets, will add materially to the quality of ProLogis' direct-owned portfolio. The acquisition will also add proportionately to ProLogis' portfolio of direct-owned stabilized assets, which Fitch views as much stronger from a leveragability and cash flow standpoint than land and development assets. Several factors partially offset some of the positives, including that ProLogis' leverage may rise modestly to the extent that bridge financing is required to complete the transaction. As Catellus was a nearly 100% secured borrower, ProLogis' already light unencumbered asset coverage may also be diluted modestly. Fitch believes that combination of ProLogis and Catellus will give the combined company a market share of roughly 13% of domestic distribution/bulk real estate development. While the combined expertise and experience of the two companies should be expected to lead to continued success in ProLogis' effectiveness at developing and selling high quality assets, it may also increase development risk on the company's balance sheet. ProLogis' rating strengths center on the size and quality of its diverse multinational pool of industrial warehouse properties. In general, the portfolio has exhibited solid occupancy rates and a strong quality of tenants and tenant diversity. In particular, Fitch believes that ProLogis' international presence adds diversity and robustness to the core earnings stream and gives the company an edge in its ability to attract and retain high quality tenants as well as gather and interpret market intelligence. In addition, ProLogis has demonstrated substantial acumen at managing development projects in a variety of the world's most desirable warehouse and industrial real estate locations. Other strengths center on the company's deep management team. ProLogis' interest and fixed charge coverage metrics continue to be adequate for its rating level. However, in recent years ProLogis has shown increasing reliance on gains on sale and equity in the income of unconsolidated subsidiaries. For example, recurring fixed charge coverage which includes rental revenue, management fees and equity in subsidiary income as revenue sources, was 1.54 times (x) for Q1 and 1.52x for 2004 which is low for the rating category. With capitalized interest excluded from these coverages, the metrics improve to 1.98x and 1.84x, respectively. This underscores the interest cost associated with the development business, as nearly 100% of capitalized interest is attributable to projects developed for sale to third parties or funds. Including all gains on sale and capitalized interest expense, ProLogis' fixed charge coverage increases to 2.54x for Q1 and 2.40x for fiscal 2004 which is superior to its industrial peergroup. (Fixed Charge Coverage defined as EBITDA, less tenant improvements, recurring capital expenditures, and straight line rents divided by the sum of interest expense, preferred dividends and capitalized interest). Together, Fitch views the fixed charge coverages as adequate for the rating category. ProLogis' core leverage, defined as debt divided by undepreciated book capital, is also solid for the rating category even at 47.3% at the end of Q1 and 44.5% at the end of 2004. These metrics are near or below most peers. From a risk adjusted standpoint, Fitch believes that ProLogis' leverage has been increasing which reflects the company's growing component of undeveloped land, development properties, and equity in unconsolidated joint ventures. Nevertheless, risk-adjusted leverage continues to be acceptable. Rating concerns center on the growing component of investments in joint ventures, which tend to have less transparency with respect to commitments and contingencies, increased legal complexity, and less reliable cash flow streams to the parent company than traditional direct-owned stabilized operating properties. Other concerns center on the company's significant use of variable rate financing, which accounted for 35% of total indebtedness at March 31, 2005. This level is uncharacteristically high and is driven by heavy use of the company's revolving credit facility to finance development, and is expected over time to return closer to the 20% range. ProLogis also has significant releasing risk, with approximately 19% of total base rents in the direct owned portfolio maturing in 2005, although this is reduced to 12% if the property funds are included. The Catellus acquisition also helps mitigate this concern as total base rents of approximately 12% expire in 2005. Moody's Affirms Baa1 Sr Unsecured Rtg For Prologis; Rating Outlook-Stable Dow Jones Newswires 6-06 Moody's Investors Service affirmed the senior unsecured debt rating for ProLogis at Baa1. The rating outlook is stable. These rating actions are in response to ProLogis' announcement on June 6, 2005, that it will be acquiring Catellus. The acquisition includes 36.4 MSF of industrial space, which at March 31, 2005, was 95.7% occupied, 3.1 MSF of office space with an occupancy of 85.1%, and 1.1 MSF of retail space, which was 88.9% occupied, as well as developable land. The transaction is anticipated to be financed as follows with common stock, unsecured debt, assumption of CDX's secured debt $1.1 billion and asset sales. According to Moody's, ProLogis' acquisition of Catellus will enhance PLD's market position as an industrial property landlord in the USA -- especially on the West Coast -- provide new growth opportunities for its funds business, and further solidify its position as the leading industrial REIT. This transaction provides the REIT with improved access to strategically important distribution markets in California and Chicago -- key to its growth -- as well as a large portfolio of developable land. The transaction provides PLD with high quality complementary assets that will substantially enhance ProLogis' core property portfolio. In addition, the acquisition of Catellus will provide ProLogis access to landholdings in strategically important industrial markets such as California, Chicago, New Jersey, Dallas and Atlanta. The acquisition financing incorporates a large proportion of common equity, which is a plus. The rating affirmation also considers the de-leveraging structure of this transaction with debt + preferred declining to 50.6% from 54.6% at March 31, 2005 (pro rata for JVs). The addition of newly acquired assets to ProLogis' core portfolio and projected material growth in the unencumbered assets pool are also positive rating characteristics. These strengths are attenuated by a 400 basis point increase in secured debt, a decrease of 20 bps of fixed charge to 2.5X, and integration risks. The latter risk, however, is mitigated by ProLogis' recent successful acquisition and incorporation into its operating platform of another large acquisition -- Keystone. The stable rating outlook reflects Moody's view that despite the increase in secured debt and drop in coverages, the acquisition of Catellus enhances ProLogis' core owned portfolio and will boost PLD's standing as an industrial landlord and property developer in the USA, and further solidify its position as the leading industrial REIT. Moody's believes that over time the REIT will successfully integrate the Catellus assets into its operating platform. Upward movement in ProLogis' ratings would be predicated on further strengthening of global franchise as evidenced by reaching an asset base of close to $20 billion and deeper leadership in international markets, sustained size and strength in the REIT's wholly owned property portfolio, lasting reduction in development exposure to under 10% of the REIT's wholly owned properties and consistent operations at an effective leverage under 50%. Fitch Affirms Senior Housing Properties 'BB+' Senior Unsecured Debt Rating Business Wire 6-14 Fitch Ratings has affirmed the 'BB+' senior unsecured debt rating of SNH. Fitch also affirms the 'BB-' rating of trust preferred securities issued by SNH Capital Trust I, a wholly owned financing subsidiary of SNH. The Outlook remains Stable. The ratings reflect SNH's solid and consistent coverage metrics. The company exhibits sound financial flexibility through its primarily unencumbered asset base and substantial availability under its $250 million bank line of credit. It also possesses minimal near-term requirements with regard to lease expirations and debt maturities as only 1% of leases and less than 10% of debt comes due in the next five years. SNH is well positioned within its peer group in the health care REIT industry in deriving a majority of its revenue (84%) from facilities that are 'primarily private pay,' meaning these properties constitute at least 80% private pay resources and are not subject to the annual renewal process of the federal government relating to Medicare reimbursements. The company's portfolio features four different components of the health care facilities industry and is allocated as a percentage of revenue in the following manner: independent living facilities (57%); assisted living facilities (27%); nursing homes (11%); and hospitals (6%) and is geographically diverse with properties in 32 states with only Florida (13%) and Texas (10%) representing more than 10% of total investment. As of March 31, 2005, SNH's portfolio had an overall occupancy of approximately 88% and was broken down into 91% occupancy for independent living, 84% occupancy for assisted living, and 88% occupancy for nursing homes, which compares favorably with the average for the health care REIT peer group. The ratings acknowledge the very high tenant concentration of the company's top tenant (Five Star Quality Care), which represents 61% of SNH's total revenues. In addition, SNH has 11 tenants in total. Moreover, Five Star, which was initially created by Senior Housing Properties Trust to operate properties, currently has approximately 66% of its total properties and 49% of its revenues coming from SNH facilities, so there is a certain degree of interdependence between the two companies. Furthermore, Sunrise, who manages the properties in one of the two leases that SNH has with Five Star (another 20% of Five Star's properties and 44% of its revenue), has its own separate lease with SNH and is actually SNH's number two tenant in terms of concentration at 20% of revenue. Although the company has shifted its focus away from skilled nursing facilities over the past five years, SNH still has some exposure to the variable nature of changing Medicare and Medicaid reimbursement policies that are annually set by the government. The interest coverage ratio for the quarter ended March 31, 2005 was 3.2 times. The fixed-charge coverage ratio for this period was 2.9x after accounting for the $3.7 million of capital improvements on the most recent cash flow statement. Both of these measures compare favorably to Fitch's health care REIT universe. Debt leverage stood at 32.9% of undepreciated book capitalization at the end of Q1-05, which is also in line with comparable companies. As of Dec. 31, 2004, Fitch estimates the company also had a solid unencumbered asset coverage of unsecured debt of 3.0x. AMLI Residential Responds To Moody's Rating Cut Hannah Clark; Dow Jones Newswires 6-24 AMLI Residential Properties Trust (AML) responded to Moody's downgrade, saying the company will see only a small increase in margins on its credit facilities. In a press release Friday, AMLI said it has no publicly or privately placed bond issues that will be affected by the rating change. The company is considering changes, such as refinancing its credit facilities, that would mitigate the downgrade's effects. Earlier Friday, Moody's downgraded AMLI's senior unsecured debt to Ba1, a junk rating, because of weak earnings and moderate deterioration in the company's credit metrics. In the first quarter, AMLI's funds from operations fell 23% from a year earlier to 43 cents a share. AMLI develops and manages upscale apartment communities. Quick Facts Marcus & Millichap's much-watched Retail Trends report shows the retail industry is "in balance" with development. The report also warns of "excess inventory inflating vacancy." Indeed, development this year should yield slightly less than last year‘s 100 million feet. Vacancy is just under 10%. M&M‘s data show that between 40% and 50% of new retail construction is being driven by big-box anchors such as Wal-Mart, Costco and Target, while another 30% or so comes from core neighborhood community centers where strong grocers act as anchors and help attract financing. But that still leaves a hefty chunk – between 20% and 30% - of new construction with more of a speculative aspect. In addition, all the new building of big-box retailers means that plenty of older big-box stores will be going dark. (Peter Slatin, The Slatin Report 6-07) Of the six biggest REITs owning large chunks of more than one property type, three have done well: Vornado, Washington REIT and Lexington Corporate Properties. The other three have posted below-par earnings growth or generated poor returns for investors or both since 2000: Trizec, Cousins and Crescent. (Stephane Fitch, Forbes 6-20) Crescent (owner of offices, hotels, cold storage) was beloved in the mid-1990s for its famous chairman, Richard Rainwater, an astute investor of the Bass family's wealth. But Crescent made a misstep by paying $388 million for mental health hospitals run by Charter Behavioral Healthcare Systems, which then filed for bankruptcy. So Crescent is scrambling to boost its income. Its funds from operations falls 29% short of covering its $1.50 dividend. Crescent notes it is making up the $50 million shortfall by selling assets and reaping profits from residential developments. Chief Executive John Goff, who cofounded this REIT with Rainwater, projects Crescent's FFO to recover to $2 a share by 2007. (Stephane Fitch, Forbes 6-20) More REIT Links News Links
Update: Fourth Experiment in Stock Picking 6-30-05 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 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 of 04's 300 basis point out-performance by 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 will not last a year - as planned additions to the portfolio will come in late spring to early fall. Leading candidates for admission at this time are: [1] Mall: MAC; [2] Retail: CARS [200 more purchased @ $33.19 on 4-21], maybe CDR [GARP] or more DDR [growth]; [3] Apts: MAA/UDR [value]; [4] Office: KRC [growth], maybe PKY [value] - or Industrial FPO; and [5] Health Care LTC, VTR 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. I also plan to add to the existing portfolio of MLP/Energy stocks [currently ETP, EDP and XOM] shares in MMP and TPP [larger caps with strong distribution growth history] and MWE/XTEX [smaller cap growth]. And I will start a bank portfolio with large-caps BAC, C, and WFC and mid-cap/regionals ASBC, CBCF, CBSS and RF. This gives me a larger menu than budget - so purchases will have to leak over into 2006. [BAC, CBSS and WFC were purchased in early June.] 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. OFC on 5-19 declared a quarterly dividend of $0.255 per Common Share of beneficial interest [an increase from 24 cents/share]. The dividend will be paid on 7-15 to shareholders of record on 6-30. UDR on 2-16 announced a 2.6% increase in its dividend for 05 to $1.20 per share. ARE on 2-14 updated its 2005 earnings guidance, based on it's view of existing market conditions, to an FFO of $4.78 [vs a current consensus of $4.80]. On 5-11, ARE announced expected 05 FFO/share to be $4.79. On 6-20 Alexandria raised dividend 3% To 68 cents per share. AMB on 3-01 declared a regular cash dividend for Q1 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. 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.
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