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REITs
2009 REIT Outlook: Still Cautious; Silver Lining Could
Be Liquidity Concerns Easing
REITs
Anthony Paolone, CFAAC
(1-212) 622-6682
anthony.paolone@jpmorgan.com
Michael W. Mueller, CFAAC
(1-212) 622-6689
michael.w.mueller@jpmorgan.com
Joseph Dazio, CFA
(1-212) 622-6416
joseph.c.dazio@jpmorgan.com
Sarah E. King
(1-212) 622-5670
sarah.e.king@jpmorgan.com
Michael Lewis, CFA
(1-212) 622-2958
mlewis2@jpmorgan.com
J.P. Morgan Securities Inc.
See page 98 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
We think REITs will have a tough time again in 2009. We believe negative returns –
albeit not as bad as the almost 38% drop in 2008 – should be expected. Street earnings
estimates should decline as fundamentals prove weaker than expected, in our view,
and dilution is sustained from equity issuance, higher debt costs, and high cap rate
asset sales. Fixing balance sheets should be viewed positively, but when the dust
settles, we think valuations will look expensive. We think REITs will underperform
the S&P 500 given J.P. Morgan’s strategy forecast of a possible 20% market return.
• Weak fundamentals should lead to more earnings downside... Job losses
accelerated through 2008 and could continue well into 2009. Given the lag in
commercial real estate trends, we expect the worst occupancy and rent trends of the
cycle to unfold this year. We estimate that when looked at from the top down, 2009
Street FFO estimates could have another 6% downside.
• …And higher valuations; attracting capital could be a challenge. Stocks
currently trade at about 12x estimated 2009 cash flow before any further
fundamental downside or dilution – this may not be cheap enough to attract value
investors. The implied cap rate of the group is currently 7.5-8.0%, which is lower
(higher valuation) than where private market values may ultimately settle,
potentially making it tough to attract NAV-centric investors. And with negative
earnings growth, growth investors probably aren’t interested right now.
• The focus on balance sheet risk will remain central, but a lot has been
discounted already. Commercial real estate will continue to have liquidity
challenges for a while (particularly with its 2010-12 debt maturity bubble), but we
think much of this risk was discounted into REIT stocks late in 2008. We think loan
extensions and adding equity to balance sheets will be commonplace, and it is
justifiable to put balance sheet strength above earnings in this environment. In fact,
easing concerns about liquidity and balance sheets could be the upshot to the group
this year – and we see this as the biggest risk to our cautious stance.
• Property-type selection will be challenging again. Company-specific dynamics
can easily overtake property-type trends (i.e., like GGP vs. SPG last year), but that
said, we have a defensive bias. We are more favorable toward high-quality retail,
despite the weak consumer, and think core performance from triple net and health
care will be better than the group average. Hotels, office, apartment, and industrial
should experience below-average core trends.
• Other themes we anticipate in 2009: We discuss in the report, among other things,
our view that: 1) investors seeking risk should look closely at some of the lowmultiple
stocks that could perform well if liquidity concerns abate; 2) dividend cuts
will continue, and expect changes to timing and stock/cash components; 3) for
dedicated investors, what’s “important” in the index has changed; and 4) investors
should continue to focus on earnings quality – looking beyond gains/fees.
• Our Overweight-rated names going into 2009: BDN, BXP, DEI, EPR, ESS, FRT,
MAC, NHP, REG, SKT, and SPG
Table of Contents
2009 REIT Outlook: Still Cautious; Silver Lining Could Be
Liquidity Concerns Easing ......................................................5
Fundamentals Should Hit Cyclical Lows in 2009 – Expect REIT Earnings Estimates
to Come Down Even Further .......................................................................................7
Liquidity Remains a Major Issue for CRE, but Much Already
Discounted in Stocks .............................................................10
Why Is Debt Capital Hard to Come By?....................................................................13
What Is Creating the Forthcoming Debt Maturity Bubble? .......................................14
The Words “Extension” and “Dilution” Will Be Prevalent in 2009 – but Could Be
Good for the Stocks ...................................................................................................15
Other Key Themes for 2009 ...................................................16
Dividend Issues: More Cuts and Nuances to Come...................................................16
Companies to Trade Off Dilution for Better Balance Sheets.....................................18
Earnings Quality: The End of an Era .........................................................................19
Stock Weighting Considerations................................................................................20
Office REITs: The Pressure from Mounting Job Losses to
Be Felt in 2009 ........................................................................21
Apartment REITs: We Expect Weak Fundamentals; Liquidity
Card Already Played...............................................................27
Industrial REITs: Bull Market Models Hit a Wall in 08; Still
Facing Headwinds..................................................................42
Some Themes for 2009 ..............................................................................................42
Retail REITs: Trying to Hold the Line While the Consumer
Pulls Back ...............................................................................46
Themes for 2009 ........................................................................................................46
Triple Net Lease REITs: Still Defensive, but Not Without
Risk..........................................................................................51
Health Care REITs: Defensive Nature Paid Off in 2008; Not
Immune to the Environment Though ....................................54
Some Relevant Themes for 2009...............................................................................54
Valuation Snapshot................................................................57
“Technical Risk” Remains Well Above the Broader Market and In Line with
Financials...................................................................................................................58
2008 Performance Review .....................................................60
What Worked in 2008? ..............................................................................................61
REIT Volatility Spiked Again in 2008 ......................................................................64
Yield Spreads End the Year Just Off Historical Highs ..............................................66
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