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REITs Have Curbed Their Buying Appetite

Acquisitions: After a 2 1/2-year binge, market upheaval has prompted the industry to sit tight.

October 20, 1998| From Bloomberg News

BOSTON — The real estate investment trust industry, after a 2 1/2-year, $100-billion buying binge that fueled earnings growth, is now trying to weather the current market storm by simply sitting back and waiting.

Over the last five years, the REIT industry has mushroomed into about 200 companies with a market capitalization of roughly $160 billion. Many of the REITs that sprang up during the decade were the product of the last recession, when they scooped up cheap properties by using their shares to finance purchases.

Since then, REITs have relied on acquiring ever more properties in order to grow and increase earnings. Now, with the debt markets all but shut to them and slumping stock prices making it harder to finance acquisitions, most are being forced to wait for property prices to fall.

"For many companies, doing nothing is the right thing to do for a while," Eric Hemel, a real estate analyst at Merrill Lynch & Co., said at the National Assn. of Real Estate Investment Trusts' annual convention in Boston. "Today you probably have more opportunities to destroy value than create value," he said.

Hemel and others at the meeting talked about how REITs can best survive the current market turmoil.

REITs, which had been the main buyer of properties until the spring, have already scaled back acquisitions, which tumbled 39% in the third quarter to $8 billion, the lowest level since the beginning of 1997.

Many REITs are being forced to reevaluate past strategies and think about how to squeeze more out of the properties they already own.

New Plan Excel Realty Trust Inc., for instance, plans to spend $500 million over the next three years to improve the performance of its 38 million square feet of shopping centers.

"That's where the largest return has been in our business," said the company's chairman, William Newman.

With uncertainty about the economy and real estate prices gradually dropping, many REITs are trying to decide when is the best time to jump back in.

"There are certainly more opportunities out there than there were six months ago," said Michael Fascitelli, president of Vornado Realty Trust, one of the largest REITs with investments in cold storage and New York City office properties. "How you manage your balance sheet is critical."

If stocks fail to recover, some REITs will be considering taking on more debt to finance acquisitions.

"You don't want to dilute your stock or reduce shareholder value by going out and raising equity based on your stock," said Mortimer Zuckerman, chairman of Boston Properties Inc., which owns 116 office buildings in major U.S. cities. "Yet there are still opportunities. It seems the best way to do it is to increase your borrowing."

Investors have traditionally rewarded REITs that have low levels of debt, and most analysts and industry executives here said increasing borrowing in most cases makes little sense. Industry executives say the REITs with the deepest pockets will be best positioned to take advantage of the market as prices continue to drop.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The REIT Track

Here is stock information on 28 real estate investment trusts based in Southern California. Shown are the stocks' closing prices Friday, high and low prices for the last year and current dividend yield. The current yield is based on dividends paid over the last year, but thatmay not be indicative of the dividends a REIT will pay in the future. Investors should research individual REITs before considering a stock purchase.

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Ticker Friday Southern California REITs symbol Exchange close Low* High* Alexandria Real Estate Equities ARE NYSE $26.75 $25.19 $34.56 5.98% American Residential Investment INV NYSE 4.63 4.00 16.75 10.38 Apex Mortgage Capital AXM NYSE 9.06 7.13 15.00 Arden Realty ARI NYSE 21.56 19.75 31.75 Burnham Pacific Properties BPP NYSE 13.06 12.25 15.75 Center Trust ACH Amex 11.50 9.50 18.25 G&L Realty GLR NYSE 15.31 14.50 21.75 Health Care Property Investors HCP NYSE 34.13 29.56 40.00 IMPAC Commercial Holdings ICH Amex 4.31 1.88 19.75 IMPAC Mortgage Holdings IMH Amex 4.56 2.75 18.31 42.96 Imperial Credit Commercial Mortgage ICMI Nasdaq 8.63 6.50 19.13 IndyMac Mortgage Holdings NDE NYSE 11.88 7.38 27.19 Irvine Apartment Communities IAC NYSE 25.63 23.00 32.44 Kilroy Realty KRC NYSE 20.38 18.50 30.00 LTC Properties LTC NYSE 16.31 15.75 21.94 Macerich MAC NYSE 26.06 22.25 30.38 National Golf Properties TEE NYSE 26.44 22.88 33.69 Nationwide Health Properties NHP NYSE 21.88 19.38 26.94 Excel Realty Trust NXL NYSE 21.63 19.25 26.13 Pacific Gulf Properties PAG NYSE 19.13 16.25 24.00 8.78 Pan Pacific Retail Properties PNP NYSE 19.63 16.50 22.75 Price Enterprises PREN Nasdaq 4.63 2.25 20.25 PS Business Parks PSB AMEX 19.25 18.00 26.63 Public Storage PSA NYSE 25.69 22.63 33.63 Realty Income O NYSE 25.50 23.44 27.38 Sunstone Hotel Investors SSI NYSE 8.63 6.50 17.88 Westfield America WEA NYSE 17.00 14.25 18.75

Southern California REITs Yield Alexandria Real Estate Equities ARE American Residential Investment INV Apex Mortgage Capital 11.92 Arden Realty 7.79 Burnham Pacific Properties 8.04 Center Trust 12.52 G&L Realty 10.19 Health Care Property Investors 7.56 IMPAC Commercial Holdings 41.74 IMPAC Mortgage Holdings IMH Imperial Credit Commercial Mortgage 11.36 IndyMac Mortgage Holdings 15.92 Irvine Apartment Communities 6.01 Kilroy Realty 7.95 LTC Properties 9.56 Macerich 7.06 National Golf Properties 6.51 Nationwide Health Properties 7.68 Excel Realty Trust 6.87 Pacific Gulf Properties PAG Pan Pacific Retail Properties 7.75 Price Enterprises 30.27 PS Business Parks 5.19 Public Storage 3.43 Realty Income 7.88 Sunstone Hotel Investors 13.22 Westfield America 8.35

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*52-week range

Source: Deloitte & Touche

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