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July 2005

Federated/May Store Closings Will Affect Mall REITs

Janet Morrissey, Dow Jones Newswires 7-29-05
    News confirming that Federated Department Stores will be shutting 68 stores in 66 malls will affect a number of mall real estate investment trusts. However, analysts and mallowners said many of the stores are located in highly-popular malls where space should be easily re-leased. The closures are part of Federated's $11 billion takeover of May Department Stores .
    "Interestingly, many of the store closings are occurring at what we would consider to be very strong malls, such as Polaris Fashion Place, Danbury Fair Mall, The Oaks, King of Prussia Mall and the Galleria in Houston," said Banc of America Securities analyst Ross Nussbaum, in a note. "For dominant malls with strong sales, any closings should be a net long-term positive, allowing the owners to fill the space with a more productive retailer at potentially higher rents." REITs with the biggest exposure to the store closings are Westfield Group, Macerich, Simon, General Growth Properties, and Mills.
    Westfield's U.S. unit will see 12 stores at 11 of its malls closed, said CFO Mark Stefanek. The malls represent 16% of Westfield's U.S. retail properties. However, Westfield sees the closures as an opportunity. The company is in talks to acquire the stores from Federated as it sees an opportunity to redevelop and improve its portfolio by owning these stores.     The closings will affect 16 stores in Simon's portfolio. The 16 represents approximately 9% of Simon's 172 malls and only 5% of Simon's overall portfolio of 295 properties. Rick Sokolov, president and COO of Simon, is undaunted. He said the 16 stores are located in "high-quality" malls in strong markets, where the average sales per square foot approaches $500. "We have already initiated conversations with a wide range of potential users that are interested in stores that might become available," Sokolov said. "We are confident that we will find quality replacements for any Federated store closings."
    Approximately 11 of Macerich's 78 malls will be affected, according to Chief Operating Officer David Contis. This works out to about 14% of its malls. "We're always working proactively to improve our centers," he said. He declined to comment further on the company's plans for dark stores.
    At General Growth, 13 of its 209 malls - or about 6% - will be impacted by the closings, while three of Mills Corp's 41 centers - or about 7% - will be affected. Mills spokesman Dave Douglass said his company had been expecting the announcement for some time. "We've been in talks with other potential tenants there's been strong interest in the sites," Douglass said. He expressed confidence that the company will be able to release the space at similar, if not better, rents.
    Other REITs with exposure include Glimcher, where two of its 25 malls are affected, and CBL, where one of the company's 72 malls will be impacted.
    "Long term, we believe that this issue (store closings) will ultimately prove to be a profitable endeavor for the mallowners although there will certainly be some bumps along the way," said Merrill Lynch analyst Steve Sakwa, in a note. UBS analyst Ian Weissman noted that many of the stores are located in dominant malls with above-average demographics - thereby "increasing the probability for a quick turnaround on re-leasing." Nussbaum said he believes the space should be easily re-tenanted or redeveloped at attractive returns, with little impact on net operating income. Weissman also expects "limited downward FFO revisions" from the mall REITs as a result of the closures. However, the closures aren't without risk. In the longer-term, Weissman they do face a risk that other tenants in the mall may leave if a strong replacement anchor tenant isn't quickly found.

Snake Oil & SSNOI Growth

Factoids, 7-28-05
    When Richard Moore of Keybridge Capital Markets asked DDR about its SSNOI growth - this started a mini-sermon by one of the DDR exec's. DDR said that they have BIG problems with SSNOI numbers - which have been kind of low for DDR compared to its peers. BUT - this metric causes us 'disdain'. When analysists are comparing SSNOI for DDR with other companies, this should be done in connection with an eye toward the cap ex. DDR said that basically no cap expense is done in the DDR portfolio. Other companies invest in tenant improvements and other cap ex - so their SSNOI grows. The important point: The impact of this higher SSNOI growth at other companies on FFO growth is nil. DDR outperforms on FFO growth - while other companies grow SSNOI but do not outperform DDR on FFO growth. DDR ended with "YOU GUYS [referring to his audience of analysts] should be pointing that out! Something is going on with those numbers."

Simon Ppty's China Expansion Seen As Strategic Plus

Janet Morrissey, Dow Jones Newswires 7-25-05
    A decision by Simon Property Group to start building shopping centers in China is being hailed as a potentially good move strategically, although it's not clear if the developments will offer bigger returns than the ones the company currently gets in the U.S. Simon anticipates unlevered returns of 10%, which is consistent with those in the U.S., said Banc of America Securities analyst Ross Nussbaum. "While we like that Simon is expanding its global footprint, we would have preferred to see higher returns, given the added political, currency and geographic risk" that the company faces in China, he said.
    Simon announced Monday that it had formed a joint venture with Morgan Stanley Real Estate Funds and SZITIC Commercial Property Co. Ltd. to build 12 retail shopping-center projects in China ranging in size from 430,000 to 750,000 square feet. All centers will be anchored by a Wal-Mart. Warner theaters will also be an anchor tenant in some projects.
    Under the venture, Simon and Morgan Stanley Real Estate Funds will each hold a 32.5% ownership stake in the venture while SZITIC, which is a unit of the Chinese state-owned firm Shenzhen International Trust & Investment, will retain a 35% interest. The venture will manage the properties, which means Simon will not receive separate management fees.
    KeyBanc analyst Richard Moore said Wal-Mart has indicated it plans to greatly expand its presence in China to 90 from 48 stores, and Moore speculates that Simon could wind up teaming up with other Chinese firms to help Wal-Mart build centers to house these new stores.
    Moore sees little risk in Simon's expansion into China since the company is teaming up with a unit of a Chinese state-owned trust and investment firm that should help guide Simon through the government, land and construction issues in that country. He also noted that Simon's equity investment is only about $10 million per center.
    Industrial REIT Prologis entered the market in the Spring of 2004. Prologis' first three projects in China are expected to generate yields of 9.5% to 10.5%, the company said.

New Plan Excel Sells $968 Million of its Portfolio

press release of 7-19-05
    New Plan Excel (NXL) has entered into a agreement to sell 69 community and neighborhood shopping centers aggregating approximately 10.4 million square feet to Galileo America LLC, a jv between CBL and Galileo America. Galileo America, Inc. is a US real estate investment trust wholly-owned by Galileo Shopping America Trust (ASX: GSA), an Australian listed property trust. The US Partnership will purchase the assets from New Plan for approximately $968 million, comprised of $928 million of cash and $40 million of equity, at a capitalization rate of approximately 7.4% on 2006 projected NOI.
    For GAAP accounting purposes, New Plan will record a gain on the sale of approximately $183 million. New Plan expects to use a portion of the net proceeds initially to pay down approximately $439 million of additional outstanding indebtedness. In addition, New Plan currently expects to pay a special cash distribution of $3.00 per common share. The Company anticipates that any special distribution will be treated as a capital gain for tax purposes.
    As a result of these transactions and the Company's revised 2005 FFO guidance provided below, New Plan expects to reduce its annualized dividend from $1.65 per common share to $1.25 per common share. Over the longer term, net proceeds will be further reinvested in a combination of redevelopments of existing assets, new developments and opportunities across the spectrum of institutional quality to value-added shopping centers, as well as the potential repurchase of New Plan's outstanding common stock.

Yields Stink, NAV's Stink, & the Supply of Shares is Growing

David Bodamer, Retail Traffic 7-14-05
    Smith Barney analyst Jonathan Litt, who in a recent report illustrated how REIT dividend yields -- what many point to as the prime factor driving the rally, are no longer at a premium compared with other options. Litt says in the report that, with REIT dividend yields at 4.5% overall and 3.2% adjusted for taxes, 88 companies within the S&P 400, 500 and 600 offer comparable returns. In 2003, just 27 had comparable returns. Moreover, a full one-third of REIT yields were below the 10-year Treasury. In 2003 REITs on the whole enjoyed a 40 basis point spread. "We can no longer explain the REIT rally as a function of investors thirst for yield," Litt says. The REIT analyst has a "flat to down 10 percent" view for REITs in 2005, although he added, "there is nothing imminent to derail the rally."
    Litt's not alone. According to a recent Morgan Stanley report compiled by retail REIT analyst Matthew Ostrower, mall and shopping center REIT cap rates are at their lowest absolute levels since 1996. "Likewise, implied price per square foot is higher today than at almost any point in the valuation history we have compiled," according to the Morgan Stanley report. Retail REITs are trading at a 10% premium to underlying net asset value -- according to Morgan Stanley. In contrast, in 2003, retail REITs were trading at a 5% discount to NAV.
    REITs have taken advantage of their popularity to hit the market up repeatedly with new IPOs and secondary offerings. Through the first six months of 2005, 107 total offerings raised $17.6 billion. That's just slightly off 2004's pace of 266 offerings raising $38.7 billion. In the past two years, there have been 35 REIT IPOs compared with just 13 in the previous five years combined. (That is eerily reminiscent of the Internet mania: In 1999, 292 IPOs raised $24.1 billion. In 1998, 45 IPOs raised $2.1 billion.) In all, 195 REITs have a combined market cap of $326.4 billion. That's more than double the size of the REIT universe in 2002 when 189 public REITs had a combined market cap of $138.7 billion.

REIT Floating-Rate Debt Rises

Janet Morrissey, Dow Jones Newswires 7-12-05
    Real estate investment trusts surprisingly are facing more exposure to floating-rate debt than they were a year ago, according to JPMorgan analyst Michael Mueller. This could slow funds from operations growth. "Our expectation prior to performing this analysis was that variable-rate debt exposure would have declined as REIT management teams took advantage of the low long-term rate environment to term out floating-rate debt," said Mueller, in a note. But "the findings of our study indicate that this was generally not the case."
    His study found that overall floating-rate debt levels rose 360 basis points on average to 20.5% of total leverage from 16.9% a year ago, as of the end of the second quarter. To put this in perspective, every 100-basis-point rise in short-term rates could hurt funds from operations by 2.4%, up from 1.8% a year ago.
    The biggest gains in floating-rate debt came among mall REITs, where their exposure jumped 840 basis points. GGP's highly leveraged acquisition of Rouse is part of the reason, but even that transaction was stripped out, the sector's variable-rate debt increased 330 basis points on average. Development activity appeared to contribute to the increase.
    Self-storage and health-care REITs also experienced big increases in floating-rate debt exposure, rising 600 and 780 basis points, respectively. For self-storage REITs, part of the increase was due to two IPOs. In the health-care sector, the increase appears to have been driven by Nationwide Health Properties and Health Care REIT. The only sectors seeing a decline were manufactured housing and industrial REITs, whose exposure slipped 630 basis points and 80 basis points, respectively.
    Overall, variable-rate debt represents 29.4% of regional mall REITs' total leverage, 20.5% of apartment REITs' debt, 19.9% of shopping center REITs' leverage, 19.3% of industrial REITs' debt, 18% of hotel REITs' leverage, 16.3% of office REITs' debt, 15.2% of self-storage REITs' leverage, 13.4% of health-care REITs' debt, and only 5.5% of manufactured housing REITs' debt. Mueller said he believes much of the exposure is already written into the companies' FFO projections. "Most Street estimates incorporate some level of rising interest rates into future earnings," he said.
    The REITs with the biggest exposure and risk to short-term rate increases are Trustreet (TSY), GGP, Affordable Residential Communities, Maguire and Mills. Those with the least exposure include Correctional Properties, Education Realty, Feldman Mall, Omega Healthcare and PS Business Parks.

Office-Market Turnaround

Ryan Chittum, WSJ 7-08-05
    The office market expanded strongly in Q2 as companies leased more space, a sign they expect to expand their work forces. Office-building vacancies tumbled to their lowest level in three years, and rents registered their second quarterly increase in a row after four years of declines. The national vacancy rate dropped to 15.4% in Q2 from 15.9% in Q1, according to the survey of the top 67 U.S. office markets by Reis. Rents jumped 0.7% in Q2 to $20.32 a square foot a year from $20.18 a square foot in Q1. That builds on a 0.6% jump in Q1, which was the first rent increase in four years. Absorption was a strong 19.5 million square feet in Q2, the second-best performance since the Q4-00 and nearly double the 10.4 million square feet absorbed in Q1. New construction remained well in check, with just 6.6 million sq ft of office space completed during the quarter, compared with a peak of 44.2 million sq ft in Q4-01.
    Reis had been projecting that rents would grow a modest 1.6% this year. But with rents already up 1.3% in the first half, the full-year figure will likely well surpass that prediction, said Dan Quan, an analyst with Reis. "There's some momentum kicking in," Mr. Quan said. "Given that last year we were still seeing negative rent growth ... it's fairly dramatic."
    Across the country, the best markets are concentrated on the coasts, and the poorest markets are in the Midwest. Washington, helped in recent years by an expanding government and booming defense contractors, continued to have the lowest vacancy rate in the nation, at 7.5%. New York City and Long Island, N.Y., tied for second place at 9.7% each. San Bernardino, Calif., and Orange County, Calif., rounded out the best five markets, both with vacancy rates hovering at about 10%. At the other end of the market, Dallas continued to lag far behind the rest of the country, with vacancies at 24.6%. Denver was second-worst, at 20.2%, followed by Cleveland; Memphis, Tenn.; and Columbus, Ohio, all at about 20% vacancies.
Related:     Q1 Uptick in Office Rents - Parke Chapman, National Real Estate Investor [4th article]

Lodging Update

Parke Chapman, National Real Estate Investor 6-01-05
    This may be the best time to own a stabilized U.S. hotel property in five years. Fundamentals are improving fast, low interest rates continue to buoy the sales market, and the summer season — that operational windfall — is now here. This combination, plus a flurry of residential conversions that are thinning inventory, has transformed hotels into an incredibly lucrative property class.
    “The good times will last for at least another couple of years, making it a great time to be a seller,” says Morris Lasky, CEO at hotel management concern Lodging Unlimited. The 50-year hotel veteran cautions that many “amateur” investors are pouring money into condo hotels in a trend that he finds troublesome. “This is begging a problem in the next few years, and we expect to see plenty of properties foreclosed,” says Lasky.
    Regardless, the year kicked off on a strong note with national lodging occupancy hitting 58.4% at the end of the first quarter. That represented a 2.8% increase above its previous level just 12 months earlier, reports Smith Travel Research. Meanwhile, revenue per available room increased by 7.2% over that period to hit $52.74.
    That's a strong showing since the first three months of the year typically represent one of the weakest stretches for the industry. One factor that helped: Easter fell in March this year versus April last year. With increased travel over the long Easter weekend, the activity may have bolstered first quarter lodging performance. The supply side is equally as encouraging. There were approximately 100,000 new hotel rooms under construction at the end of March, says Smith Travel Research president Mark Lomanno. “We anticipate room supply growth will remain relatively low and healthy demand growth will continue, leading to higher occupancy and good pricing leverage for 2005,” says Lomanno of the Hendersonville, Tenn.-based lodging research firm. Indeed, more investors are buying and selling their properties. The total value of U.S. hotel properties that traded last year was nearly double the 2003 level. Jones Lang LaSalle Hotels reports a record $12.9 billion worth of U.S. hotels were sold in 04, versus $6.7 billion in 03.
    Many hotel properties are being targeted for residential conversion. In Manhattan, six of seven major hotel properties sold last year will be either fully or partially converted to residential use. This is largely a response to New York's ultra-hot residential sector, which has led the market for years. The Plaza Hotel, which sold for $675 million last year, is the most notable example of this trend. Israeli real estate firm El Ad Properties is converting the building's 805 rooms into 200 luxury condos.
    Since September 2004, the number of Manhattan hotel rooms has declined by 0.3% (or roughly 56,000 rooms) based on Pricewaterhouse Coopers data. That would represent the largest decline in room supply in a decade. “This is a great time to sell. The capital markets are extremely aggressive,” says Anthony Pierson, managing director of portfolio management at Cornerstone Real Estate Advisers LLC. “That alone should help keep the market liquid.”

Insider Selling Soars 43% Among REITs In Q2

Janet Morrissey, Dow Jones Newswires 7-06-05
    Insider selling activity among real estate investment trusts soared 43% in the second quarter from the first quarter, reaching a three-year high. "Soaring stock prices in the second quarter stimulated many REIT insiders to sell at record levels," said Lehman Brothers analyst David Harris, in a note. The Morgan Stanley REIT index rose 15% in the quarter, he said. Insider selling occurred at 23 of the 36 companies that Harris tracks, up from 20 in the first quarter. Sales totaled $296 million, up from $169 million in the previous quarter. Harris said the second-quarter insider sales volume was 101% above the $147 million REITs have averaged over the past 12 quarters that Lehman has been tracking the data.
    Insider selling was heaviest at Vornado, Simon, Boston Properties, Maguire Properties and Pennsylvania Real Estate Investment, with each seeing sales exceed $10 million. About 17% of all sales were attributed to insiders exercising options rather than outright sales, the report said. Insider buying declined to only $300,000, from $1 million in the first quarter and $33 million in the fourth quarter of 2004. AMLI Residential Properties was the sole company buying in the quarter, which may indicate its executives feel its stock is cheap.

Department Stores' are Being Replaced at the Mall

Maria Halkias, Dallas Morning News 7-09-05
    The four corners of the mall aren't reserved for major department stores anymore as industry consolidation reduces their ranks and developers look for ways to make their projects relevant to more people. Dark spaces in malls once would have worried operators, but they no longer seem as daunting. Now, the industry calls them "redevelopment opportunities."
    "We're thinking about putting tenants in our centers that we never would have thought of five years ago," said William S. Taubman, COO of Taubman. Which is why Taubman is packing white-tablecloth restaurants into some of its malls, and why Simon's new Firewheel Town Center in Garland will feature office space atop the stores. Still, for all of the new cross-shopping and mixed-use projects in the pipeline, Mr. Taubman added, "It remains to be seen if all of it is going to be successful or not."
    Those pushing the envelope of mall redevelopment will get a big test by next year, as Federated's acquisition of May produces more empty real estate. About 100 U.S. malls have both Federated and May stores. Closings are certain at malls with overlap as regional chains, including Foley's, are rebranded as Macy's. Simon's CEO, David Simon, told an industry conference last month that "we're extremely confident" about the Federated-May merger fallout. Simon's focus will be on retail, he said, but "there are going to be some opportunities in very dense areas where we'll look to maybe do office or multi-family residential."
    John Bucksbaum, CEO General Growth Properties, said that a Natick Mall project in Massachusetts is just the first of many that will have residential components. In addition to Nordstrom and Neiman Marcus, the center will have two residential towers, and the grounds will include bike paths and other residential amenities. Mr. Bucksbaum also expects apartments or condos to be added to projects in Hawaii, Virginia and Las Vegas.
    Hotels aren't strangers to malls, but that match-up is accelerating. For the first time, Starwood Hotels & Resorts set up shop at the International Council of Shopping Centers annual meeting in Las Vegas in May, the industry's main leasing event. A spokesman for Starwood said the company is interested in mixed-use projects but that it's "too early to say if we struck any deals."
    Full-service restaurants in bunches are also being courted as alternatives to department store anchors. California-based Macerich has added a leasing position devoted to full-service restaurants. Taubman's new mall in Richmond, Va., Stony Point Fashion Park, has six full-service restaurants including P.F. Chang's and Fleming's Prime Steakhouse. "In terms of revenue, those six restaurants do as much volume as an anchor," Mr. Taubman said. The expansion of Dallas' NorthPark Center, which includes a Nordstrom and an AMC theater, will bring six additional full-service restaurants. Three are already there.
    Developers have also seen success in building up Las Vegas' shopping venues. And the combination of gambling and shopping is expanding outside Nevada. In May, Chelsea Property Group opened the 381,000-square-foot Seattle Prime Outlet on the Tulalip Indian reservation, next to the tribe's casino. "It opened very strongly," said Les Morris, a spokesman for Simon, which acquired Chelsea, the largest outlet mall developer, last fall.
    While Neiman Marcus, Nordstrom, J.C. Penney and Dillard's, among others, are said to have dibs on some spaces that open up in the Federated-May merger, they may be competing with other new rivals that include discount giants Target and Wal-Mart. Target – which has said malls are now part of its new store site-selection process – is big on Simon's radar screen, Mr. Simon said. One of the last big mall exits came with the demise of Montgomery Ward, which left Simon with 27 large spaces to fill. Target stores went into several of those vacancies, including one at Richardson Square mall. Target has been a great partner of ours, and I think they'll be more and more a player in the mall environment," Mr. Simon said.
    According to a recent report by the International Council of Shopping Centers, regional malls and centers have reduced their dependence on department stores, which greatly increases mall operators' flexibility when dealing with anchor vacancies. About 20% of all mall anchors are discount chains, big-box stores, cinemas, sporting goods stores and off-price chains, industry data show. Taubman put a Robb & Stucky into a former Lord & Taylor anchor space at its International Plaza in Tampa, Fla. And in a sign of the times, sales from the furniture store exceeded those of the department store it replaced. A mall expansion in Canoga Park, Calif., by Australian developer Westfield Group will see a Target and Neiman Marcus under one roof.
    It's not just the four corners that are getting new uses. Air rights are, too, according to Dougal M. Casey, head of research at ING Clarion in New York. "It's like getting something for nothing. Putting condominiums or office space above the stores is like getting free land," he said. The Dallas area's newest regional shopping center, in fact, will have 75,000 square feet of Class A office space above the shopping. Firewheel Town Center is scheduled to open in Garland in October and will be anchored by Dillard's and Foley's. It will include big-box tenants Linens 'n Things, Barnes & Noble and Circuit City.
    The trend toward open-air centers in recent years has "made the point that a lot of good retail can come to a development without three or four anchor department stores, sometimes without a department store," Mr. Casey said. But he isn't convinced that the department store is always replaceable. "Say, if I had a project with a Neiman Marcus, I could sure attract more tenants," he said. "This is an industry that for 50 years was built on the idea that you need department store anchors. All this recapturing of department store space for other uses – all of that is a book yet to be written."
    Four reasons mall operators are thinking outside the box to fill their largest vacancies: [1] Early successes with restaurants, supermarkets and other uses are encouraging more innovation. [2] Reducing their department-store dependence gives operators even more flexibility. [3] Using air rights — building atop a shopping center — “is like getting free land,’’ as one expert put it. [4] Because of retail consolidation, they can’t rely on department stores. Period.
Related:     Living At The Mall - Janet Morrissey, Dow Jones Newswires [6th article]
Mall Sweet Home - Ilaina Jonas, Reuters [11th article]

Apartment Vacancy Rate Falls to Average of 6.4%

Michael Corkery, WSJ 7-06-05
    The nation's apartment market continues to climb out of a four-year slump, posting another quarter of declining vacancies and rising rents. The vacancy rate for the top 67 metropolitan apartment markets in the U.S. fell to an average of 6.4% in Q2, from 6.6% in Q1, according to new statistics from REIS. Average rents also increased slightly. Effective rents, the rents minus repairs and concessions, rose an average of 0.5% to $883 a month, after rising 0.6% in Q1. In last year's second quarter, average effective rents had risen 0.7% over the previous quarter. Researchers say there's now a healthier balance of supply and demand. The number of apartments occupied by tenants rose by 10,103 units in Q2, after an increase of 3,584 in Q1.
    A major factor driving these numbers is condo conversions. Developers are rushing to turn rental apartments into condominiums, thus reducing the rental supply. Fewer new apartment buildings are being built because most new construction is giving rise to condos. "It does seem to be going in the right direction," said Daniel Quan, director of quality assurance at REIS. "Depending on who you speak to, they might want it to move faster, but vacancy continues to come down and the effective rent is going up."
    Local apartment markets that experienced the greatest declines in vacancy rates from the first to the second quarter, according to REIS, included: Louisville, Ky., with a decline to 8.2% from 9.2%; Miami with a decline to 4% from 5%; Omaha, Neb., with a decline to 6.5% from 7.3%; Sacramento with a decline to 6.2% from 6.9% and Las Vegas with a decline to 4.2% from 4.9%. Markets that saw the greatest increase in vacancy rates included New Orleans to 6.7% from 6.2%; Greensboro/Winston-Salem, N.C., to 9.0% from 8.5%; Kansas City to 8.3% from 7.9%; Memphis to 10.4% from 10.0% and Denver to 9.3% from 9.0%.

EOP Sells Nearly $2B in Assets During First Half of 2005

Dana Dubriwny, Globe Street 7-01-05
    Equity Office Properties Trust released 1.6 million sf for a total of $297.6 million, while bringing in a $1.3 billion gain during its Q2-05. With the bulk of released properties located in California, disposed assets across the country totaled nearly 10 million sf.
    Richard Kincaid, EOP's CEO, says that with year-to-date sales totaling $1.6 billion, the company is on target to sell $2 billion to $3 billion of assets by year-end. “It is the right business decision to take advantage of today's strong asset-sale environment to sell non-strategic properties,” Kincaid says.
    The company expects to identify approximately $80 million of gains and $170 million of non-cash impairment charges related to sales closing in Q2. The company notes a $200 million to $215 million impairment charge due to accelerated disposition plans and a reduction in the intended holding period on 53 additional assets (totaling 6.7 million sf) anticipated to sell after June 30, 2005. This is expected to reduce net income and FFO in the company’s Q2 results.
    While selling off non-core assets, Kincaid says the company plans to focus on its strongest properties and targeted growth markets. Moving forward, the company plans to expand holdings in the following markets: Atlanta; Austin; Boston; Chicago; Denver; Los Angeles; Oakland East Bay, CA; Orange County, CA; New York; Portland, OR; Sacramento; San Diego; San Francisco; San Jose, CA; Seattle; Stanford, CT; and Washington, DC. To date, Equity Office Properties Trust boasts a portfolio of 634 buildings comprising 117.4 million total office portfolio sf in 18 states and the District of Columbia.

How Long Can REITs Stay Hot?

Ben White, Washington Post 7-03-05
    There is a rising chorus of bears who think REITs are in just as much of a bubble as private homes in hot markets. According to the Leuthold Group, REITs rose 239% from the end of 1999 through 2004, a bubble-era kind of pace. The firm also found that REITs now trade at about 16 times FFO. The historical average is about 11.8 times FFO. In addition, Leuthold noted that the flow of money into REITs has become highly volatile, with big swings on a week-to-week basis depending on REIT performance. For instance, in a recent four-week period, mutual fund flows into REITs jumped to more than $1 billion from $357 million. Such fluctuations can signal that investors are jittery and that a sector is about to top out and go into decline.
    As with energy, there are plenty of real estate bulls who think there is lots more money to be made in the sector. Among them is Joseph R. Betlej, manager of the Ivy Real Estate Securities Fund, who thinks interest rates are likely to remain low by historical standards despite the Fed's campaign of short-term hikes while economic growth will continue at a moderate pace. "We have an economy that strongly supports real estate -- the Goldilocks economy is very good for the sector," he said. In addition, Betlej thinks pension funds looking for liquidity to pay baby-boom beneficiaries will also look to REITs. "We see a huge demand for current-income-producing investments, and real estate is a great source of current income," he said.
    Betlej is most bullish on hotels because revenue per available room in the industry is rising as business travelers spend more. And there is still a shortage of rooms dating to a lack of building that occurred after the Sept. 11, 2001, terrorist attacks slammed the travel industry. Betlej is also increasingly interested in apartment buildings, as rental rates are starting to rise. But he remains pessimistic about office real estate because it is costing developers a great deal to find tenants. And even Betlej doesn't think real estate will be able to keep up the torrid pace of the past few years. Instead, he is looking for returns to drop to 7 to 9 percent a year during the next decade, which he still thinks will compare favorably to both stocks and bonds.

Rating Agency Updates

    On 7-25 Moody's Affirms Baa2 Sr Rtg Of First Industrial with a Stable Outlook. S&P Revises Ventas Outlook To Positive; Rating Affirmed on 7-11. Fitch Affirms Plum Creek Timber Co Ratings At 'BBB-' on 7-11. Fitch Upgrades Developers Diversified's Sr Unsec To 'BBB' on 7-06.


Quick Facts


    In the CRE conference call of 7-29, CRE noted that it is finding 'deal fatigue' in some real estate markets. While competition for property deals is still hot for trophy properties, some desirable properties over being slightly overlooked and can be purchased at reasonable cap rates. CRE's explanation: There are only so many people who are looking at the deals, and the number of deals has climbed as cap rates have fallen. (Factoids 7-29)

    Kimco's Board of Directors declared a two-for-one split to be effected on August 23, 2005 to shareholders of record on August 8, 2005. The Board also approved a quarterly dividend increase of 8.2%, raising the pre-split quarterly dividend payable per common share to $0.66 from the current quarterly level of $0.61 per common share. (press release of 7-26)

    According to Green Street Advisors, REITs are starting to make other types of stocks look really cheap. REITs are trading at 19 times estimated 2005 "adjusted funds from operations". The S&P 500, by contrast, is trading for about 15 times 2005 estimated net. The disparity in p/e ratios has never been worse, according to Green Street. REITs stack up only slightly better against bonds. Low-investment grade corporate bonds are yielding about 6% interest compared with the 5% "AFFO yield" for REITs. Over the past dozen years, bonds have had this kind of premium over REITs only 8% of the time. (Stephane Fitch, Forbes 7-13)

    Taubman Centers may build up to 12 shopping centers in China, Japan and South Korea as part of its Taubman Asia initiative, launched in April, reports Shopping Centers Today. Taubman Asia, based in Hong Kong, plans to focus primarily on Tokyo and New Songdo City, South Korea. The company is still researching in China for potential projects. More than 100 malls were added to the Chinese market over the past year. "China has more focus on it than any market in the world," said Taubman Asia president Morgan Parker to the SCT Newswire. (SCT Newswire 7-01)


More REIT Links


News Links
Commercial Investment Real Estate     NAREIT Real-Time Market Index
Development Magazine
National Real Estate Investor
Divident Discount Model @ REIT-Net     Real Estate Journals & Organizations
MagPortal Property ULI's Real Estate Capital Markets Update
NAREIT's Portfolio Magazine Yahoo Stock Screen
MREIT's.com - Mortgage REIT Site The Slatin Report
MNB - Retail News Site Progressive Grocer
Multi-Housing News National Multi Housing Council
Stock EPS/FFO Stat Links
My Way     Zacks
Dividend History
Yahoo-Reuters Annual Income Statements Yahoo Dividend History

Update: Fourth Experiment in Stock Picking 7-29-05


    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 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 $776 and ICF's $640.
    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 more DDR [growth]; [3] Apts: MAA/UDR [value]; [4] Office: KRC [growth], maybe PKY [value] - or Industrial FPO; [5] Health Care LTC, VTR or WRS [high growth, high yield, low Price/FFO] and [6] a hotel REIT or two.
    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 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 ARE raised dividend 3% To 68 cents per share. ARE announced 8-02 that expected 05 FFO/share to be $4.81.
    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. On 7-12, CARS increased its dividend 2% to 44.6 cents per share from a prior level of 43.8 cents. The company also reaffirmed its guidance for an annual common share dividend of $1.80 per share in 2005.
    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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