REIT Players Crossing Fingers The Worst Is Over

What a difference six months makes.

The pervading sense of doom that permeated the National Association of Real Estate Investment Trusts conference in November was missing during REIT Week this week in New York, with chief executives, Wall Street analysts and economists waxing poetic about the potential for acquisitions and massive deleveraging while noting that challenges remain ahead.

"The financial Armageddon scenario is over," Michael Fascitelli, Vornado Realty Trust's (VNO) chief executive, said on the sidelines of the three-day conference that concluded Friday morning at the Waldorf Astoria. "The risk for survival is out of the market."

Mitchell Hersh, president and chief executive of Mack-Cali Realty Corp. (CLI), a New Jersey-based office REIT, said during an interview "there has been renewed confidence that access to capital exists."

Until March, REITs had been hammered amid concerns about the financial services industry as well as commercial real estate malaise as a continuing credit crunch made it difficult to refinance upcoming debt maturities. The industry's saving grace has been massive amounts of equity issuance allowing REITs more flexibility to reduce debt.

Since the beginning of the year, REITs executed 45 common stock offerings through May, raising some $14.2 billion in capital, according to NAREIT. By comparison, there were 76 offerings in all of 2008 totaling $14.5 billion. The optimistic tone has fueled REIT prices higher by 54% since March 6 - where many experts say a bottom was hit - through May, according to the FTSE NAREIT All REITs Index.

Amid concerns about overvaluation, the financial services market, the recession and credit risk, equity REITs fell 15.7% in 2007 and 37.7% in 2008.

REITs, which own about $600 billion of commercial real-estate assets, were established in the 1960s to give individuals an easy way to invest in income-producing real estate. Such companies typically focus on distinct areas of property, such as offices, retail or apartments.

Drawing parallels from the real-estate crisis in the early 1990s, REITs are expected to use equity issuances to finance acquisitions and bring leverage down to 25% by the second-quarter of 2010, according to a new analysis presented by NAREIT during the conference.

The organization said such re-equitization and lower debt ratios could pave the way for $582 billion to be on tap for acquisitions by the end of 2012. And acquisitions, initial public offerings and increased market capitalization could push the REIT composition of the broader commercial real estate market to roughly 30% by the end of 2012 from roughly 5% currently, based on market capitalization, says NAREIT.

But, the economy is still the 800-pound guerrilla in the room. NAREIT's assumptions don't take into account economic factors and market participants say that job growth and the health of the economy will ultimately determine the trajectory for REITs.

"I wouldn't be in a rush if I were a CEO," said Mike Kirby, director of research at Green Street Advisors, during a panel discussion Wednesday. He noted that REITs still need to continue to fix their balance sheets. "Distress isn't here yet."

He said he thinks the pace of acquisitions will be less than what the market anticipates: "No one wants somebody else's balance sheet" in this environment.

Mack-Cali's Hersh said that when the company moves to spend capital, they need to have adequate replacement costs.

"We are going to be very, very careful," he said.

-By A.D. Pruitt, Dow Jones Newswires, 201-938-2269, [e-mail]