Stephen’s Posterous

REITs, Real Estate Investment Trust, own and manage office buildings, shopping malls, rental apartments and other properties, have enjoyed big gains in 2009. The Dow Jones Equity REIT Index has almost doubled in value since March 2009, versus a 56% gain by the Standard & Poor's 500 index.

Barron's Online recently interviewed Paul Curbo, co-manager of the AIM Real Estate Fund (IARAX), about the current REIT environment. The $1.1 billion-asset fund that he manages focuses on equity REITs. The fund is ranked by Morningstar as the third-best performing real-estate fund based on 10-year annualized returns, despite losing 36% in 2008.

REITS used to have low volatility, high dividends, and a steady cash flow. Mr. Curbo says that real estate is a capital intensive industry and when capital is not available or is expensive, it can be hard to value an equity REIT. He says that REITS have raised about $16 billion in 2009, improving their balance sheets and providing funds as needed to acquire more assets from property owners loaded with debt.

Mr. Curbo believes that real estate will lag the overall economy, and he doesn't expect improvements in operations until 2010. Debt is still a major issue. There is over $1 trillion in mortgages on commercial and multifamily mortgage properties that will come due between 2010 and 2013. Some of these properties will need to be recapitalized or sold.

Current valuations on REITS reflect an improving credit market. Historically, equity REITs trade at premiums to the value of their real-estate assets. The spread between cash flow yields generated by REITs and the lower yields generated by Treasuries is wide, which is normally a good indicator of future performance.

REIT stocks were inexpensive earlier this year, and are now closer to fair value. If the economy or the credit markets worsen, these stocks will pull back.

One REIT that have weathered the storm is Digital Realty Trust (DLR), a technology-focused REIT that owns data-center properties and server farms.

Many companies are outsourcing data storage or face a growing need to store vast amounts of data. Digital takes space intended for other uses and converts it to a data center or builds it themselves. Digital increased rents during the downturn. They are looking at acquiring properties, and recently bumped their dividend by 9%.

Mr. Curbo's top holding, Simon Property Group (SPG), has accumulated a lot of cash with over $3 billion in cash and access to a $3 billion credit line. Simon will generate over $700 million in free cash flow in 2009. Simon's biggest competitor, General Growth Properties, is in bankruptcy. Simon has the capital to acquire assets from distressed property owners.

Mr. Curbo is underweighting retail. His retail holdings favor regional malls with longer lease terms, good operators, and strong balance sheets.

Mr. Curbo likes SL Green Realty (SLG), the largest office landlord in New York City. They maintained a high occupancy rate for their properties during the downturn and rents are relatively low compared to other landlords.

The government has focused on helping banks and improving the financial-services sector, a major tenant for office space in New York. At almost $44 a share, SL Green's share price has increased 400% since early March 2009. But it fell from a high in 2007 of over $156.

Mr. Curbo says that new home formation drives demand for apartments, and with employment not growing, there can't be strong demand for apartments during the next year. However, people need a place to live so apartment REITs can manage through a down cycle.

Mr. Curbo still holds apartment REIT AvalonBay (AVB), but he believes there are better picks like Essex Property Trust (ESS) and Mid-America Apartment Communities (MAA). Equity Residential (EQR) is in their top 10.

Mr. Curbo likes the markets where Equity own properties, and their price points are more attractive compared to AvalonBay.

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Barron's Online recently asked Kelly Rush, portfolio manager of Principal Global Investors' Real Estate Securities Fund about the REIT landscape. His $1.1 billion fund managed to be among the top five performing REIT funds in 2008, despite a loss of 33%, according to Morningstar data.

Mr. Rush said that REITs are weak and will continue to be weak for some time, well into 2010, and there is a lot of pessimism built into the stock price. Historically, real-estate stocks have averaged a 12 times multiple. Today, real-estate stocks are trading at a little bit less than a nine times multiple. There is a lot of room there for growth.

Mr. Rush does not believe that leverage was a major problem for the industry. General Growth Properties turned out to be a poster child for a company that went too far with leverage.

Mr. Rush's favorite REITs begin with health-care operator, Ventas (VTR), who lease their facilities to companies that run health-care operations and Public Storage (PSA), which rents mini-warehouse buildings.

One REIT that may benefit from the security of long leases is Entertainment Properties Trust (EPR), whose emphasis is with movie theaters.

Real Estate Securities Fund has owned two companies in the industrial sector for a long time: AMB Property (AMB) and ProLogis (PLD). Both have been involved in the development of industrial space worldwide. ProLogis has a lot of financial stress, but Mr. Rush believes that they are going to be able to survive.

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In most bankruptcies, stockholders wait for scraps while creditors chew over a distressed company's fate. Not so for Bill Ackman, who as a shareholder in General Growth Properties has plumped out for a prime seat at the negotiating table.

The activist investor's firm, Pershing Square Capital Management, will provide $375 million in ultrasenior financing for General Growth while it reorganizes through bankruptcy. The so-called debtor-in-possession, or DIP, financing gives Pershing valuable sway to protect its roughly 25% equity stake.

Mr. Ackman is exploiting a cash-scarce environment to juice his bet on the company's operations. With many banks too constrained to provide DIP financing, Pershing Square is empowered to push for ways to reduce the company's $27 billion in debt.

The financing terms give a hint of how much Pershing Square can flex its muscles. The pact carries 7% in combined commitment and exit fees, among the highest for any DIP agreement since the credit crisis began, according to Standard & Poor's.

Pershing Square may be rewarded handsomely. The DIP terms include warrants to buy 4.9% of the company if it emerges healthy from bankruptcy, and General Growth also has the option to repay the entire $375 million to Pershing Square in stock. This time, Mr. Ackman may have truly gone all in.

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Mall owner General Growth Properties Inc. sought bankruptcy protection early Thursday, April 16, 2009, in one of the largest real-estate failures in U.S. history, capping a precarious, months-long effort to juggle the crushing $27 billion debt load it shouldered in past acquisition sprees.

The long-anticipated Chapter 11 filing might wipe out what remains of the Chicago company's stock, but it won't result in mall closures. Many analysts suspect General Growth will survive a lengthy bankruptcy intact, but perhaps smaller after selling properties, without resorting to liquidation. General Growth, which owns and manages more than 200 malls, is the second-largest U.S. mall owner by number of properties behind Simon Property Group Inc.

General Growth's board voted Wednesday, April 15, to make the filing in U.S. Bankruptcy Court in New York after efforts to piece together a plan for an out-of-court restructuring with a growing list of creditors failed to gain traction, according to people familiar with the talks.

The filing includes General Growth, its Rouse Co. subsidiary and most of its malls. It doesn't include General Growth's management company or joint-venture holdings. All told, the filing covers roughly $24 billion of debt, these people say. A General Growth spokesman didn't immediately return messages seeking comment.

What finally forced the bankruptcy filing after months of payment-deadline extensions was General Growth's failure to secure a deal with holders of $2.25 billion of its bonds and other lenders to abstain from demanding immediate payment while the company tried to restructure its balance sheet outside of bankruptcy.

Several holders of past-due bonds notified the company this week that they intended to sue for payment. Meanwhile, additional debts came due on an almost weekly basis.

General Growth has since November negotiated with its lenders for reprieves, sometimes ending up at odds with the likes of Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group and occasionally going for weeks at a time with debts that were past due but not called for payment.

The bankruptcy will have far-reaching implications for the mall industry, including putting pressure on the declining property values of U.S. malls, and mall mortgages, if General Growth dumps property. It also could consolidate power in the mall industry if major players like Simon Property, Westfield Group and Taubman Centers Inc. can come up with the capital to pick up choice pieces.

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U.S. REITs are preparing to grit their teeth and issue stock.

It'll be a rough ride. Investors are already shell-shocked from the 60% swoon suffered by many real-estate investment trust shares since September. Moves that could dilute their ownership might rattle them further.

But REITs need more equity: to replace debt coming due, and, for the lucky ones, to buy distressed commercial property. Healthier REITs, at least in relative terms, such as office REIT Vornado Realty Trust and mall giant Simon Property Group Inc., have already decided to pay chunks of their dividend in stock to conserve cash. But if they can raise more capital to get through the worsening slump, there should be cheap commercial property deals, with unusually high yields, to take advantage of.

Others, like shopping center owner Macerich and warehouse developer Prologis, need to pay down debt that's coming due. Facing declining demand for space and a frozen debt market, REITs are scrambling to avoid the fate of mall owner General Growth Properties Inc., which has been teetering on the brink bankruptcy.

Overseas, where real-estate stock prices have sometimes fallen even further than in the U.S., leading REITs are raising new equity. Three U.K. giants hope to raise more than $2.9 billion through rights issues. Westfield Group, the Australian mall owner, launched a $1.9 billion capital raise last month.

While Health Care REIT raised about $200 million in the U.S. in January, the chances are that equity sales wouldn't go as smoothly for companies more desperate for cash. After all, pension funds and college endowments, among the biggest investors in REITs, don't have money to throw around right now.

But for less leveraged REITs there could be an opportunity. With many private-equity property investors paralyzed by losses on debt-heavy, top-of-the-market buys, REITs that can round up enough equity to play another day could yet emerge as winners.

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Perhaps the recent movie, Confessions of a Shopaholic, has inspired everyone is the US to stop shopping, and come to the realization that happiness does not come from shopping. Or is it because we're in the midst of a recession with many individuals losing their jobs?

Signs continue to emerge that the days of free spending shoppers have come to an end, leaving the country with too much space and choice. For instance Westfield, the Australian property group that owns 55 malls across America, part of a 10m square foot global retail empire, has begun to trim opening hours in an effort to help struggling tenants cut costs.

Shaving minutes off the midweek shopping day is an overdue response to thin times. ShopperTrak, which monitors visitor numbers for shopping centres, reported a 13 per cent year-on-year decline in foot traffic for January, a month where heavy discounting was on offer to draw in punters. Further shrinkage seems likely, with the weakness of anchor tenants a particular concern.

In the past, mall owners were relatively insulated from recession by long rental agreements. Vacated space can generally be re-let. But, with large retailers such as privately held Mervyns going bankrupt, and other mall favourites such as Dillard’s shuttering stores, there is a danger that anchors pull struggling shopping centres down with them as customers go elsewhere.

At the very least, rising vacancy rates will see retailers queuing up to request rent concessions. Property and Portfolio Research predicts that the effective vacancy rate – reflecting both empty space and that which is unsupported by spending levels – will have risen from a low of 10 per cent in June 2006, to hit 18 per cent by the end of the year.

Retail real estate investment trusts have seen share prices collapse two-thirds from their peak, and funding evaporate – Developers Diversified Realty this week announced plans to sell a 20 per cent stake to the German Otto family, reflecting the creativity needed to find financing. Any such investors though will need unbending faith in consumerism to get involved.

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Debt-laden mall owner General Growth Properties Inc. has hit an unusual snag in its efforts to postpone debt payments and avert bankruptcy protection: It can't get an extension of a $225 million loan arranged by its primary advisor, Goldman Sachs Group Inc.

The payment deadline on the short-term loan passed Monday, February 2, without General Growth announcing an extension. It wasn't clear Tuesday what held up talks to postpone the payment deadline.

Goldman, which General Growth added in September as one of three financial advisers, arranged the loan last fall to give the mall owner breathing room to pay several mortgages coming due and to sell assets to raise cash. Goldman has at least one unidentified partner in the loan who has balked at providing an extension, according to people familiar with the talks

Goldman hasn't moved to foreclose on the malls pledged as collateral for the loan. If that were to happen, it would trigger cross defaults that could force General Growth to file for bankruptcy protection, people familiar with the matter say. The sides were in talks Tuesday to extend the loan. Representatives of General Growth declined to comment, as did a representative of Goldman.

General Growth, based in Chicago, owns and manages more than 200 U.S. malls, including venues such as Water Tower Place in Chicago, Faneuil Hall in Boston and Ala Moana Center in Honolulu. If General Growth eventually files for bankruptcy protection, it would rank among the largest real-estate collapses in history.

The impasse with the Goldman loan underscores the dire nature of General Growth's plight as it endeavors to avoid bankruptcy by persuading its lenders to postpone payment dates. The mall owner has warned in Securities and Exchange Commission filings that it might need to seek bankruptcy protection if it can't gain needed reprieves. It also has disclosed that it has little cash or borrowing capacity to pay chunks of its $27 billion debt load as they come due.

General Growth has been through this before. Last December it went several days without an extension on a past-due $900 million loan before lenders agreed to a forbearance pact that effectively extended the deadline until March 15. General Growth executives also managed to delay payment dates until March 15 on a $2.6 billion credit line. Another $395 million in bonds come due for General Growth on March 16.

In the interim, several smaller loans such as the Goldman loan could trip up the company and derail its bid to avoid bankruptcy. General Growth faces a $95 million mortgage on the Oakwood Center mall in New Orleans coming due on Monday. Oakwood Center was gutted by a fire after Hurricane Katrina in 2005, and, though rebuilt, it hasn't generated sales at its pre-Katrina pace. The mall may no longer be worth its mortgage amount.

General Growth also has a $58 million mortgage coming due Feb. 11 and three mortgages totaling $347 million coming due March 2. The company is in talks with its lenders to postpone those deadlines. General Growth's stock closed at 77 cents, up 2 cents, or 2.67%, on Wednesday, February 4, 2009, in 4 p.m. composite trading on the New York Stock Exchange.

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General Growth Properties negotiated with lenders for extensions of payment deadlines on big debts on December 14, 2008, but found its efforts to win an extension on a $900 million bank loan blocked by Citigroup. The six other lenders in the loan had agreed to a long-term extension, but all must agree for the pact to be completed. Two weeks prior, Citigroup scuttled General Growth's bid for a long-term extension of the debt by demanding changes to terms on an unrelated $2.6 billion credit line and term loan that General Growth landed in 2006. Citigroup supplied more than $100 million of that 2006 loan. The sides ultimately agreed on a two-week extension that expired on December 12, 2008.

General Growth, which owns and manages more than 200 U.S. malls, amassed a $27 billion debt load in an acquisition spree in recent years. The $900 million loan General Growth is trying to extend is backed by two luxury malls on the Las Vegas Strip: Fashion Show mall and the Shoppes at the Palazzo. If the lenders on that loan declare General Growth in default, it would trigger cross defaults of other General Growth debts and force the company to seek bankruptcy-court protection. Though the 2-week extension of the loan expired on December 12, the lenders didn't declare General Growth in default as negotiations continued through the weekend. Source.

Hedge Fund investor William Ackman is doubling down on his bet that General Growth Properties will be able to avoid bankruptcy. General Growth faces a major debt deadline of $900 million on Friday, December 12, 2008. Fitch Ratings said on December 9, that default appears imminent. Last month Mr. Ackman reported that he had acquired a 7.5% stake in General Growth, which has been struggling all year to reduce its $27 billion debt. Mr. Ackman;s company Pershing Square Capital Management, which has over $5 billion under management, has entered into swap contracts with BNP Paribas, Citigroup Inc. and others institutions that give Pershing the economic benefit of owning another 18.1% of General Growth. It also owns an undisclosed amount of the company's debt, which might give it a seat at the bankruptcy table. Mr. Ackman has a reputation for having a good eye for real-estate values. Analysts are wondering what the company's more than 200 malls are worth. General Growth closed at $1.71 on December 10, 2008. The stock's 52-week high is $47.89. Source.