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Chief Financial Officer Mike Pappagallo raised his funds from operations guidance for 2006 to a range of $2.12 to $2.16 a share, citing strong fundamentals and a good acquisition environment, up from $2 in 2005. Thomson First Call currently pegs the company's 2006 FFO at $2.13. In 2005, the company completed more than $1.4 billion in acquisitions, exceeding the $1.1 billion in deals Bear Stearns analyst Ross Smotrich had been expecting and the $600 million Kimco projected at the start of the year. The 2006 guidance assumes Kimco will make $750 million in acquisitions in 2006, although executives admit this could go higher. The company also expects to invest at least $100 million in redevelopment projects each year. So far in 2006, the company has acquired interests in 47 additional properties in the U.S., Canada and Mexico for $316 million. "We're not deterred [from making acquisitions] by concerns of lumpy earnings or difficulty in computing a number for an NAV [net asset value] exercise or that we have to keep generating these new opportunities to keep our earnings growing," said Chief Financial Officer Mike Pappagallo, during the call. The 2006 projection could actually come in much higher as it doesn't include the impact from the company's pending joint venture acquisition of Albertson's. During the call, Cooper turned down repeated questions about the deal, citing confidentiality agreements. He expects it will be at least four months before the deal closes. Chief Investment Officer David Henry said the company is targeting properties that have redevelopment potential, below-market rents, and need a complex acquisition structure when making acquisitions. The company is also looking to expand to Latin America, South America and parts of western Europe. "Kimco's international expansion, together with our strong core portfolio, our growing asset-management business and our four distinct operating businesses all combine to provide a solid and stable platform for growing our company and our earnings," said Henry. Bank of America analyst Ross Nussbaum expects Kimco to generate FFO growth of at least 10% through 2010. "The company has a track record of growing earnings at an above-average rate and consistently beating expectations," he said. Nussbaum doesn't hold shares in Kimco, but his firm has had an investment-banking relationship with the company over the past 12 months. Smotrich doesn't hold shares in Kimco, and his firm hasn't had an investment-banking relationship with the company over the past year.
Shopping malls can be more susceptible to downturns in the economy and changes in consumer taste than their strip-mall cousins because they put more emphasis on discretionary items; strip malls tend to have more stores selling nondiscretionary items and are less affected by slips in consumer sentiment. The shopping-mall vacancy rate tiptoed up to 5.5% in Q4 from 5.4% in Q3, according to a quarterly survey of the top 67 U.S. markets by Reis. Asking rents moved up 0.5% to $38.27 per square foot per year in Q4 from $38.08 in Q3. The 5.5% mall vacancy rate at the end of 2005 was slightly higher than the 5.3% logged at the end of 2004. Rents were up just 1% for the year, putting their two-year gain at an anemic 0.9% after a 0.1% decline in 2004. Asking rents at strip malls, on the other hand, gained a solid 3.2% in 2005, their best showing in five years. While the strip-mall vacancy rate crept down to 6.8% at the end of 2005 from 7% a year earlier, absorption -- the net change in occupied space -- was strong at 30.3 million square feet, also the best showing in five years. For the quarter, average rents in strip malls were up 0.9% to $18.41 a square foot from $18.24 in Q3. Absorption was strong at 8.6 million square feet, but a stepped-up construction pace lifted vacancies to 6.8% in Q4 from 6.7% in Q3.
Doctrow said healthcare REITs underperformed the REIT industry in 2005 and are up only 0.5% so far in 2006. However, the sector offers an attractive 6.2% dividend yield on average, which is 230 basis points higher than the 3.9% equity REIT average. Also, the group is projected to generated adjusted funds from operations growth of 6.3% in 2006 and 2007, he said. "We believe healthcare REITs are currently trading at an attractive discount to the rest of the REIT sector," he said. With respect to the individual upgrades, Doctrow said he believes the accounting issues that plagued Healthcare Realty in 2005 are now fully disclosed and that the company is once again filing on schedule. Healthcare Realty faced a number of accounting and operational issues, which included the firing and replacement of its auditor, a delayed filing of the company's 2004 10-K, and a delay in certain construction projects that lowered the company's projected funds-from-operation growth for 2006. Doctrow noted that the company has the highest quality assets of any healthcare REIT with a strong focus on medical office buildings on hospital campuses. Banc of America Securities on Thursday [2-03] said it downgraded the healthcare real estate investment trust group to "underweight" from "market weight" and cut its ratings on two group components. The brokerage firm cut Health Care REIT to "sell" from "neutral" and its price target on the stock to $32 from $38, saying the stock was overvalued at 25 percent premium to net asset value. Banc of America also pared Ventas to "neutral" from "buy" and its price target to $30 from $33, saying in its research note that the company was heavily exposed to one tenant. The brokerage said analyst Ross Nussbaum, who assumed coverage of the healthcare REIT group from Gary Taylor, changed the price targets on two more companies. Nussbaum raised the price target on Health Care Property Investors to $27 from $25 and maintained its "neutral" rating. The analyst lowered the price target on Nationwide Health Properties to $22 from $22.50 and maintained the "neutral" rating on the stock.
Unlisted REIT's — operated by independent companies, or sponsors, and marketed by brokers and financial planners — have been attracting a steady flow of investment dollars. An estimated $6 billion was raised in 2005, down from its peak of $7.2 billion in 2003 and just below the $6.3 billion in 2004, according to Spencer Jefferies, publisher of Direct Investments Spectrum, a newsletter. At Wells Real Estate Funds, one of the biggest sponsors with more than 35 million square feet of space in 163 buildings, sales rose by 30% in 2005 from the previous year, said Tom E. Larkin, the senior vice president for sales. (The CNL Financial Group, the Inland Real Estate Corporation and Dividend Capital are among the other big sponsors.) At the same time, the portfolios have grown. Altogether, unlisted REIT's acquired about $9.4 billion in commercial property in 2005, up from $7.9 billion in 2004 and $1.2 billion only five years ago, according to Real Capital Analytics. "There has been a significant surge of interest in these types of investments," said Ralph Block, author of "Investing in REIT's" and senior REIT portfolio manager for the Phocas Financial Corporation. "The main reason is that people are looking for income, especially the baby boomers as they near retirement." Indeed, one benefit of owning an unlisted REIT is that the regular quarterly dividend tends to be higher than those paid by the traded ones. According to the NAREIT, dividends paid by unlisted REIT's have averaged roughly 6 to 7%, compared with 4 to 5% for traded ones. The group puts the universe of nontraded REIT's at 16. (True private REIT's, usually much smaller in size and numbering about 800, neither register with the SEC nor trade shares.) "Nonlisted REIT's are looking for income-oriented investors, and they pay out most or more of their cash flow, which is why they have higher dividends," Mr. Jefferies explained. "This is a controversial aspect." Of course, there are other factors to consider besides income. "There are advantages and disadvantages to owning them — the key is for the investor to be educated on all of them," said Hank Madden, a money manager who occasionally sells private REIT's to his clients. "It's really a matter of personal preference." Sponsors, in fact, caution that only long-term investors need apply. Stuart J. Beebe, the chief executive and president of CNL Retirement Properties, an unlisted health care REIT, which acquired around $400 million in property last year, said investors should be prepared to hold onto their shares for around 10 years. "It's clearly a much longer time horizon" than other investments, he said. Mr. Larkin agreed. "They're not for everyone," he said. "What our investor sees is an opportunity for diversification and long-term income." He described the typical shareholder as someone in his or her 50's with $20,000 to $25,000 to invest (although minimum investments for private REIT's range from $1,000 to $5,000). Share redemption programs vary, but they usually place tough limits on a holder's ability to cash out. Many unlisted REIT's have "list or liquidate" provisions. These specify that after a defined holding period, usually 7 to 12 years, the sponsors must decide either to list the shares on a public exchange or to liquidate the properties and return the prorated proceeds to shareholders. In some cases, they may opt to extend the list-or-liquidate deadline. The holding period for CNL Retirement Properties is set to end in late 2008. Wells, meanwhile, must also decide in 2008 whether to list or liquidate what it calls REIT I, which was established in 1998; it has until 2015 to make that decision on REIT II. While investors who stay the course could potentially profit from either listing or liquidation, those who may need to cash out earlier are likely to have a difficult time because there is no public market to sell their shares. This is perhaps the biggest criticism of unlisted REIT's. Some sponsors offer "distress" redemption opportunities to shareholders who need to liquidate because of emergencies, though the shares are bought back at a discount. Sponsors say the main advantage is the greater stability involved in not having to buy and sell on the public REIT market, which has a total capitalization of $336 billion. Fixed-price shares, after all, cannot lose value — or gain, for that matter. "The value on a listed stock can fluctuate on a day-to-day basis," Mr. Larkin said. That may be true, Mr. Block countered, "but that doesn't mean that the valuation doesn't go up and down." (In fact, the underlying value of the properties held is likely to fluctuate.) "It just means people don't know what the value is," he said. That brings up another criticism: less transparency. Unlisted REIT's are public to the extent that they are registered with the SEC and must file quarterly reports. But as Stephen M. Coyle, the chief investment strategist for Citigroup Property Investors, said, "Investors won't be able to truly look day to day at how they're doing." That, of course, also gives unlisted REIT's freedom from analysts' microscopes. "Daily market-to-market valuations and transparency are very important for most retail investors," Mr. Coyle said. The financial planners and brokers who sell private REIT's can help provide relevant financial data, but dealing with them can be expensive. Most sponsors of unlisted REIT's take selling commissions, along with dealer manager fees and offering expenses, from their investor capital; those can add up to 10 to 17% of the initial investment. "You really have to look closely at exactly what the fee structure is," Mr. Block said. Lately, though, some fees have been declining. And REIT executives say that their fee structures may not be all that different from those of front-end-load mutual funds. Still, high fees can dilute returns and exacerbate poor performance, especially for highly leveraged REIT's, the critics warned. Some recalled the problems associated with real estate limited partnerships, also closely held, during the 1980's, when property values plummeted. "We haven't really seen them in action in a down market as yet," Mr. Fasulo said of private REIT's. "In order to prove themselves as a capital source, they have to go through one down cycle and survive the complications that would be involved." On 2-03 LHO priced a public offering of 3,250,000 of its common shares to be sold 2-07. On 2-06 Simon (SPG) reported that Q4 FFO topped analyst expectations. FFO rose to $1.47 a share from $1.36 in the year-earlier period. Revenue was $889.8 million, up from $821.4 million. Analysts had been looking for, on average, FFO of $1.44 a share on revenue of $891 million, according to Thomson First Call. The regional-mall REIT lifted its dividend 8.6% to 76 cents a share, payable Feb. 28 to stockholders of record Feb. 17. On 2-02 Mid-America Apartment Communities announced that its 2006 FFO is expected to range from $3.18 to $3.32 a share, compared with fiscal 2005 FFO of $3.20 a share. On 2-02 Archstone-Smith announced that its 2006 FFO is expected to range from $2.11 to $2.21 a share [analysts expect $2.18], compared with fiscal 2005 FFO of $2.10 a share. On 2-06 United Dominion forecast 2006 FFO of $1.63 to $1.73, compared with fiscal 2005 FFO of $1.61 a share. On 2-13 Pan Pacific increased its quarterly dividend by 8.5% to 64 cents a share from 59 cents. PNP reaffirmed its guidance for 2006 FFO of $3.97 to $4.01 a share and is projecting earnings for the year of $2.89-$2.93 a share. On 2-16 AMB increased it dividend to $.046 per common share. The dividend reflects an annual indicated rate of $1.84 per common share, an increase of 4.5% over the 2005 annual dividend rate of $1.76 per common share. On 2-02 Keybanc Cuts Camden Property To Hold From Aggressive Buy, Stifel Nicolaus Raises Health Care REIT To Buy From Hold, and Raises Healthcare Realty To Buy From Hold. On 2-01 Banc Of America Cuts Health Care REIT To Sell From Neutral and Cuts Ventas To Neutral From Buy. Deutsche Bank Raises Kilroy Realty To Buy From Hold. On 2-03 Merrill Cuts Archstone-Smith To Neutral From Buy. On 2-08 Prudential Cuts Health Care REIT To Neutral From Overweight. On 2-10 Keybanc Cuts Kite Realty To Hold From Buy and Merrill Ups Nationwide Health Ppties To Buy From Neutral. On 2-13 Credit Suisse Cuts Digital Realty To Underperform from Neutral, and Cuts Maguire To Underperform From Neutral, On 2-13 UBS Raises Kimco Realty To Buy From Neutral, Raises Regency Centers To Neutral From Reduce and Raises Simon Property To Buy From Neutral. On 2-13 Banc Of America Cuts Brookfield Ppties To Neutral From Buy, Wachovia Cuts Brookfield Asset To Mkt Perform From Outperform to hold. Desjardins Lowers Brookfield Asset To Hold From Buy. On 2-14 Harris Nesbitt Cuts Nationwide Health To Underperform and Raises Healthcare Realty To Outperform. On 2-14 Merrill Raises Kimco Realty To Buy From Neutral. On 2-15 Stifel Nicolaus Raises United Dominion To Buy From Hold. On 2-22 Prudential Downgraded GGP from Overweight to Neutral. On 2-27 JP Morgan Downgraded WRI from Neutral to Underweight and BB&T Capital Mkts Downgraded EQY from Buy to Hold. Update: Fifth Experiment in Stock Picking 2-28-06 The new year has started, and my portfolio still lacks the 10% weighting in hospitality [AHT and SHO are candidates], the 12% weighting in apartments [GCT? or buying of AVB/BRE/ESS - but at such low yields?] and the 6% weighting in health care [with purchases of VTR] that I want. And add industrial FPO to the menu. But with prices at an all time high, it is no time to buy. But it might be a good time to lighten up on offices [and sell CRE or some VNO?]. GGP is up 25% since my purchase in August - its valuation scares me. And I want to dump MLS. The NAREIT index is 25% weighted in office and industrial, but this portfolio is 42% in those categories. The NAREIT index is 25% weighted in retail, mall and free-standing, but this portfolio is 34% in those categories. So I am uncomfortable with this portfolio's weighting and the valuations of highly weighted ARE, GGP, OFC and VNO.
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