Wednesday, June 03, 2009

REIT Equity Expectations
I just saw this on Bloomberg. I realize it is an advertisement for the REIT industry, but it brings up a good contrast. Even if public REITs don't raise $582 billion over the next few years, it shows the advantage they have over non-traded REITs. Over the past two years public REIT prices have dropped significantly. Here is a quote from CNBC on the REIT decline:
REITs have fallen precipitously over the past two years. In 2007, the FTSE National Association of Real Estate Investment Trusts All REIT Index fell 17.83 percent, then dropped 37.34 percent in 2007. While the index is down more than 10 percent in 2009 after negative months in January and February, March posted a 4.41 percent gain and April saw a rise of just under 28 percent.
The share value drop has prevented REITs from raising equity in the capital markets. Non-traded REITs with their ongoing equity offerings have been raising capital at steady, but slowing levels. Now, the publicly traded REITs appear ready to re-enter the public equity markets. The opportunities in real estate outweigh the negative of selling shares at prices well below 2007 values. They will be able to raise capital much faster (underwriters committing hundreds of million dollars), than the public non-traded REITs. This will allow the publicly traded REITs to deleverage their balance sheets, which in a paradox will allow them to borrow more, at attractive rates, due to their strengthened balance sheets.

With their new equity, the publicly traded REITs will be able to take advantage of real estate opportunities created by the credit crisis and the recession. Non-traded REITs will keep plugging along, but they are at a disadvantage to the big, publicly traded REITs that can raise several hundred million in an afternoon. I felt that the non-traded REITs held an advantage for the past eighteen months or so, as the publicly traded REITs had abandoned the equity markets. It appears that this advantage will disappear soon.

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