(Repeats story issued Oct. 25)
* Low rent and occupancies likely to show up in Q3
* Expected poor fundamentals unlikely to rattle stocks
* REIT benchmark up 90.9 percent since March 6
By Ilaina Jonas
NEW YORK, Oct 25 Most property-owning real
estate investment trusts (REITS) will begin reporting
third-quarter results this week against a backdrop of
spectacular industry stock rallies even as rents and occupancy
rates are falling.
Will weak fundamentals finally hurt the stocks during the
worst commercial real estate downturn in about 20 years?
"Underlying fundamentals over the last year probably will
show up in a more pronounced fashion probably this quarter,
compared with the somewhat benign numbers of the first couple
of quarters," Michael Knott, senior analyst at independent
research firm Green Street Advisors, said.
He noted that the sector is fairly valued.
Despite weak fundamentals, the stocks have rallied, with
the benchmark MSCI U.S. REIT Index .RMZ up 10.4 percent year
to date and up 90.9 percent since the low of March 6, when
capital markets were at their tightest.
Fueling the soaring stock prices is the ability of REITs to
From Jan. 1 through Oct. 19, property owning REITs raised
$19.3 billion by issuing new shares and $7.1 billion via
corporate bonds, according to research firm SNL Financial.
As the credit markets improved, stocks of the badly bruised
"From March and April they were what I would characterize
as a binary trade: Will they survive or will they perish?" said
Richard Imperiale, president of Forward Uniplan Advisors, which
has $720 million of assets under management. "When the capital
markets opened up and allowed REITs to begin equity again that
answered the question."
"Real estate is a derivative of credit and the economy. So
credit has clearly improved, and the economy is showing signs
of improvement," Sandler O'Neill REIT analyst Alexander
Goldfarb said, adding that he believes that REIT stocks are
Valuing the stocks requires balancing various metrics such
as price-to-funds from operations (FFO), which measures real
estate performance; price to the value of the underling real
estate or net asset value (NAV); and returns against other
types of investments.
"You can't focus on any one metric. You're going to use
them all in conjunction with one another," SNL Financial senior
industry analyst Jason Lail said.
The overall sector trades at about 111.7 percent price to
NAV and 11 times price to FFO.
SL GREEN UP NEXT
Office REIT SL Green Realty Corp (SLG.N) is scheduled to
report earnings after the market closes on Monday. Its stock
has soared 63 percent so far this year and 351 percent since
March 6. Knott rates the stock "sell" because of its soaring
New York-based SL Green's shares trade at 139.6 percent of
the company's NAV, compared with the office sector's 106.7
percent, according to SNL Financial.
The REIT is highly levered with about a 70 percent debt
relative to its asset value, compared with a sector average of
about 55 percent.
"It's highly leveraged, so as things get better that
magnified the increase in value," Knott said.
Since July 1, 2008 SL Green Chief Executive Marc Holliday
hasn't bought any of the company's stock, according to
executive compensation research firm Equilar. Chief Financial
Officer Gregory Hughes and President Andrew Mathias sold shares
within that period.
WINDOW TO REGIONAL BANKS
Because of the time it takes to sign leases and for
free-rent periods to expire, the decline in rental rates over
the past three quarters will likely begin to show up in the
"I think entering the period where of time where the next
12 months will be the worst four quarters in actual reported
results even though, you can make an argument that the worse
declines in the actual market fundamentals have already
happened," Knott said.
News of a bigger-than expected drop in rent and occupancy
could depress any REIT stock, Goldfarb said. A revenue rise
could fuel share prices. Also, the ability for a company to
meet upcoming debt will influence the price, he added.
REIT results may serve as a window into the state of
private real estate. Regional banks and thrifts are heavily
exposed to the U.S. commercial real estate because they hold a
disproportionate amount of mortgages and construction loans.
"Where occupancy is down and rents are decreased most
likely you're going to see very similar events within regional
banks," Bliss Morris, chief executive of First Financial
Network, which helps place bad loans from banks.
(Reporting by Ilaina Jonas; Editing by Richard Chang)