For the past month or so — from the day that Lehman Brothers filed for bankruptcy — retail REITs have been under seige.
The bad news has continued to pile up and it's led to many investors dumping REIT stock en masse. Let's recap the stresses on retail REITs.
There have been two high-profile and one low-profile flameouts among publicly traded retail real estate firms — Centro Properties Group, General Growth Properties and Feldman Mall Properties. That has created some skepticism about retail REITs.
Property values are falling. New estimates call for an eventual 20 percent to 30 percent correction in property values. Judging by recent cap rates, we're only halfway through that adjustment. That means companies with high leverage levels run the risk of going underwater and ending up owing more in debt than properties are worth. If that happens, it will be difficult to raise capital from any source and could trigger bankruptcies or liquidations.
Property fundamentals continue to erode. Vacancies at malls and neighborhood and community centers continue to hit new multiyear highs (see pages 6 and 8). As the consumer continues to get walloped, sales will fall further and potentially trigger more closings and less demand for vacant space.
Credit markets remain frozen. The longer this goes, the more it becomes an issue. As debt expires, companies need to refinance. That's very difficult in current markets. However, many retail REITs have been able to navigate these treacherous waters. PREIT, CBL & Associates Properties, Macerich, Glimcher Realty Trust and Equity One have all recently been able to refinance lines of credit or mortgages on existing properties.
Suspended dividends. Two retail REITs so far — General Growth and Developers Diversified Realty — suspended fourth-quarter dividends. Both companies had already met the requirements for payouts in 2008. So it's not as bad as it could be. Still, when one of the major selling points for REITs is the dividend payout, it's a bit alarming that some companies are being forced to skip.
The net result of this torrent of bad news is that most retail REITs hit new 52-week — if not all-time — lows in the past 30 days. The Morgan Stanley REIT index today stands more than 50 percent off its peak. That means it's fallen a greater degree than the Dow Jones Industrial Average or any of the other major stock indices.
But you have to really wonder if things have gotten out of control. Even looking at all the negatives, most retail REITs remain well capitalized, have decent debt-to-capitalization ratios, have manageable refinancing loads coming through and have portfolios that can weather vacancies.
Looking at yields alone, many retail REITs represent phenomenal bargains. When you also factor in the concept that some REITs have gone along for the ride regardless of fundamentals, there should be more than a few that have been dramatically oversold. In the face of panic, it might be hard to stomach buying any stocks right now. Ultimately, however, more than a few retail REITs should be great investments and provide satisfying rides when the stock market does mount its recovery.