Tuesday, November 24, 2009

Sheryl Jean: Real estate investment trusts appear to be recovering

Investors in real estate investment trusts have needed iron stomachs in the last two years, but it looks like REITs are recovering.

Some REITs have sold or forfeited properties (after defaulting or being on the verge of defaulting on loans) and taken other steps to restructure their balance sheets. This year, they've seen some easing of credit markets, total returns rise and share prices rebound somewhat. Many industry watchers think publicly traded REITs hit bottom March 6 after starting their decline in early February 2007.

REITs have been saddled with huge debt payments coming due as property values have fallen. They've also faced liquidity issues with declining revenue in a soft economy.

The big story this year is that some REITs issued new equity and debt, braving high interest rates to ease short-term debt burdens at a time when bank credit is pricey.

"A year ago, there was a lot of concern that REITs might not be able to meet their debt obligations," said Brad Case, vice president of research and industry information for the National Association of Real Estate Investment Trusts. "Starting in late March, REITs began tapping the capital markets for the money needed to meet debt obligations."

Raising more money

REITs raised $32 billion from about 120 equity and debt offerings this year through late October, up from $8 billion and 82 offerings in all of 2008, according to NAREIT.

In September, Irving-based FelCor Lodging Trust Inc. issued $636 million in new secured debt to pay off $515 million in debt due in 2011.

"That debt maturity was the single biggest risk to the company," said Steve Schafer, vice president of investor relations for FelCor. The REIT is also working with lenders to refinance about $275 million in mortgages due in 2010 to free up more cash flow, he said.

FelCor has seen its revenue and cash flow hurt by the economy- related decline in travel to its 85 hotels. Its net cash flow from operations fell by half in the first six months of 2009 from a year earlier.

'Delay and pray'

Some REITs are busy refinancing debt, buying cash flow hedges and arranging interest rate agreements. Barry Vinocur, editor of REIT Zone Publications, calls it the "extend and pretend, delay and pray" approach by lenders while property values are low.

Dallas-based Ashford Hospitality Trust Inc., which owns about 100 hotels, is refinancing some of its nearly $300 million of debt maturing in 2011 to offset cash flow declines. Its net cash flow from operations fell 26 percent in the first half of 2009 from a year earlier.

NAREIT's index of equity REITs was up 9 percent this year through the end of October vs. a 17.8 percent increase for the Standard & Poor's 500 stock index.

The MSCI US REIT price index nearly doubled from March 6 through the end of October. While prices have bounced back this year, they're still down from the market height of early 2007.

As the economy improves, look for publicly traded REITs to start buying property. That's a true sign of recovery.

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