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Property REITs now dirt cheap-Green Street

NEW YORK, March 3 (Reuters) - U.S. real estate investment trusts, publicly traded real estate companies, are dirt cheap when measured against privately held real estate, bonds or stocks, Green Street Advisors said in a report.

“I don’t think they’re table-pounding cheap,” Green Street Chairman Mike Kirby said in the report, released to clients on Monday.

“I think they finally crossed through the threshold where we’re willing to call them cheap. It’s amazing what a 50-plus decline in stock prices will do for valuations.”

But the sector is not exactly a bargain. The companies in it need to reduce their debt by about as much as they are worth in the stock market, said Green Street, an independent research, trading, and consulting firm.

Since REIT shares peaked in February 2007, the sector is down 75 percent, as measured by the benchmark MSCI U.S. REIT Index .RMZ and 64 percent since last September.

Industry leaders have all seen their stocks battered. These include Simon Property Group SPG.N, Vornado Realty Trust VNO.N, Taubman Centers Inc TCO.N Macerich Co MAC.N, Developers Diversified Realty Corp DDR.N, Kimco Realty Corp KIM.N, Equity Residential EQR.N, Boston Properties Inc BXP.N, SL Green Realty Corp SLG.N, AMB Property Corp AMB.N and Host Hotels & Resorts Inc HST.N.

REITs are the cheapest they have been since the 1998-1999 REIT bear market, relative to other investments, Green Street said in the report.

Relative to privately held real estate, REITs are trading at a 45.3 percent discount to the value of property held in private hands and their cheapest since 1993, the start of the modern REIT era.

Green Street estimated that private-market values are off about 30 percent, without factoring in leverage, from the peak, Kirby said.

REITs as measured against cooperate bonds are also their cheapest since 1993, Green Street said.

When seen against U.S. large cap stocks, REITs trade at about 7.9 times their earnings (as measured by adjusted funds from operations) compared with 10.6 for the S&P 500.

Still, REITs suffer from debt piled on over the past few years and need to raise about $100 billion of equity to bring them back to their norms, Kirby said.

“That this figure roughly approximates the existing equity market capitalization of the REIT industry ($105 billion) highlights the enormity of the task,” Kirby wrote in a separate report.

A secondary offering of stock to the general market could dilute the holdings of current shareholders. Rights offerings could be a less painful way to help fix the problem, Kirby said. Under a rights offering, companies offer current shareholders the right to buy more stock at a discounted price.

“This is a cheap market, but they could stay cheap for two years,” Kirby said. “For someone with a long-term perspective would do fine buying REITs at these levels.” (Reporting by Ilaina Jonas)

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