Opportunity in Adversity

04/29/2009 9:44 am EST

Focus: REITS

Peter Slatin

Founder and Editor, The Slatin Report

Peter Slatin, editor of the Forbes/Slatin Real Estate Report, says the bankruptcy of a major mall operator could open the door for some other big players to catch up.

The collapse of mall REIT General Growth Properties under the weight of $27 billion in short-term debt, while not a happy moment, could be a watershed in the commercial real estate industry's 12-step program out of enthrallment to short-term, excessive leverage.

If the bankruptcy court bows to pressure from bondholders for immediate repayment, then there will be what GGP shareholders certainly fear most: a liquidation fire sale of the company's assets. This will have a strong negative effect on already depressed retail asset values across the country, which in turn will push numerous private and publicly owned properties under water.

According to SNL Financial, the retail REIT sector was down almost 37% in the first quarter of 2009, and was the worst performer of any of what are known as the property sector. With the heavy hand of GGP off the scale—well, retail REITs won't fly sky-high, but they will lift. For value-conscious investors, that is a potential positive.

Recovery, of course, is still a long way off. That would suggest this is a terrible time to buy—except that share prices will not stay this low forever.

Through mid-April, investors had spent nearly $5 billion on newly issued equity offerings from established REITs. The cash flow into the sector helped push it up 13% in March, while the issuing REITs—large companies such as Simon Property Group  (NYSE: SPG) and Kimco Realty (NYSE: KIM), as well as smaller firms such as Digital Realty Trust (NYSE: DLR) and Acadia Realty Trust (NYSE: AKR)—showed a healthy premium to the overall sector.

Since March 18th, REITs have issued $4.1 billion in stock; another $700 million was raised in two equity offerings between January 1st and March 17th. The offerings have been remarkably well received, and share prices of the issuing REITs by April 17th had since climbed to 45.5% since their offering dates. This indicates that investors are seeking access to property markets wherever they can find them after being foreclosed from direct property investment by the frozen capital markets and stalled pricing.

The two class acts of retail ownership, behemoth Simon Property and focused luxury mall owner Taubman Centers (NYSE: TCO), both offer high-quality portfolios, strong balance sheets and established, professional management. Simon is playing the General Growth asset-pickup game very coolly, but we believe it could use its strengthened balance sheet to pull off some excellent value-oriented buys of high-quality properties.

Watch for either one or both to be acquirers of GGP assets at bargain prices, [although] Taubman's luxury exposure leaves it more vulnerable to consumer sentiment. (Simon closed above $47 Tuesday, while Taubman closed around $22—Editor.)

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