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REITs
Notes and takeaways from a more optimistic NAREIT
conference
REITs
Michael W. Mueller, CFAAC
(1-212) 622-6689
michael.w.mueller@jpmorgan.com
Anthony Paolone, CFAAC
(1-212) 622-6682
anthony.paolone@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 36 for analyst certification and important disclosures.
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Last week we attended REITWeek in New York City, which is the annual
NAREIT institutional investor conference. We conducted over 30 group meetings,
from which the notes are included. We found the sentiment at the conference was
overwhelmingly optimistic ?a big difference from where management heads were
just a few months ago, and different than the tone of conversations at the NAREIT
convention last November. This change in tone should be somewhat expected,
though, as the stocks have moved up 60-70% since hitting their lows in March,
and outlets of capital (debt, equity, etc.) appear more open ?we believe viability
is less of an issue in the sector. With earnings estimates having already taken a
sizable step down to reflect the weak economy, many management teams simply
seemed tired of talking about the negatives and instead are focusing more on any
signs of stabilization ?and even the next up-cycle. The following section lays out
some of the bigger-picture takeaways, followed by property type takeaways, then
the company notes.
?Liquidity remains the key topic of conversations, but viability appears to
be less of a concern. While we believe liquidity does remain a big focus on the
minds of most investors/management teams, the re-equitization that is occurring
in the sector appears to have taken the 揹oomsday scenario?off the table for
REITs. In addition, many companies have demonstrated an ability to access the
debt markets (albeit at higher rates). A variety of companies noted that TALF
2.0 could be a source of future capital for REITs. And we even got the sense that
companies are rethinking how much dilution they are willing to take on in order
to pre-fund debt maturities several years out ?i.e., taking a more balanced
approach to capital raising and being more mindful of earnings. Overall, this
suggests a much higher level of confidence about balance sheet liquidity. As
such, we think viability is less of a concern for the sector.
?Fundamentals remain quite weak, but management teams are now
expressing optimism and trying to find signs of stabilization. Most REITs
continue to see downward pressure on rents and occupancy, and tenant
bankruptcy risk (particularly in the retail space) remains high. That being said,
most management teams indicated that tenant interest/traffic is up significantly
from the first few months of the year, and some believe occupancy could level
off in the second half of this year/early 2010. This is a far cry from the
November NAREIT/1Q conference calls, when we were at the peak of the
downturn with no real signs of optimism anywhere. Another often cited positive
is the lack of new supply, which when coupled with renewed demand at some
point, should create an attractive fundamental backdrop. We would caution,
though, that it was only late in 2008 that REIT portfolios started to experience
the impact of an economy that started to weaken in late 2007. Thus, the fact that
jobs continue to be lost suggests that any real stabilizing may still be a few
quarters off ?we don抰 want to get ahead of ourselves on fundamentals.
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