In the past month or so, a number of commercial real estate investment trusts (REITs) -- including Kimco Realty (NYSE: KIM), Simon Property Group, AMB Property (NYSE: AMB), and Alexandria Real Estate Equities (NYSE: ARE) -- have announced plans to strengthen their balance sheets by issuing shares. The presence of apparently willing buyers may suggest that the commercial property market is starting to stabilize, but that looks to me like a hasty conclusion.
Consider the following facts and forward estimates from a recent Deutsche Bank (NYSE: DB) presentation:
- There are expected future price declines of 35% to 45% in the overall commercial real estate market.
- Total debt delinquency rate in the retail subsector has already broken above the prior peak of 1.63%, which was set in September 2002.
- A key Manhattan office property that was acquired in February 2007 at $1,040 per square foot is reportedly now being sold for $403 per square foot, representing a more-than-60% decline in value in just over two years.
Granted, a broad view can obscure individual situations, but the picture doesn’t necessarily improve at the company level.
Simon Property Group, in particular, looks to be in danger of holding unrealistically high expectations. On the fourth-quarter 2008 conference call, management predicted flat to slightly better financial performance in 2009. Baked into that estimate is the savings that will come from the decision to pay 90% of the dividend in stock, but the view still seems to suppose that leases can generally be renewed at historic rates. Meanwhile, investors have received a mall-style dilution special -- first, via the dividend change, and more recently, by the 17.25 million-share offering.
From an investing standpoint, I'd be hesitant to get involved with any of the mentioned stocks. If business prospects worsen, further dilution is a likely scenario. In that case, buyers may demand lower prices, which would mean that companies would need to sell a greater number of shares to reap the same proceeds.
Nonetheless, I understand that investors may feel anxious to get in on an eventual recovery in the commercial real estate market. In that case, a better play could be online marketplace provider LoopNet (Nasdaq: LOOP). The company carries no debt, recently raised additional cash through issuing convertible preferred shares (a scenario that poses little risk of repeat, in my view), and should see the same, if not greater, upside as commercial REITs once offices and malls decisively shed their poker chip personas.
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