Battered REITs Offer Bargains

10/23/2008 12:00 pm EST

Focus: REITS

Peter Slatin

Founder and Editor, The Slatin Report

Peter Slatin, editor of the Forbes/Slatin Real Estate Report, says commercial real estate is reeling, but some stocks may be attractive.

The credit and value crunch that began wiping out housing investments and homebuilders two year ago has finally seeped over into the commercial property market for office and apartment buildings, as well as malls, shopping centers, hotels, and warehouse and distribution facilities.

Prices there are not yet in free fall, but there is a good chance they will be. After all, aggregate property sales volume is off at least 70% year over year, according to Real Capital Analytics. Still, sellers are holding on to their properties, unwilling to let go at any price, while buyers are seeking deep discounts that until very recently did not seem warranted by underlying fundamentals.

That slow drip down of commercial sales prices has been heavily foreshadowed by real estate investment trust (REIT) share values. Investors are jumping ship left and right, driving REIT shares down almost in lockstep with financials.

The sector outperformed the major indexes through the third quarter-equity REITs were up almost 3% year-to-date after turning in a stunning 6.7% rise for the quarter. But that didn't help once global panic took hold.

Within a week in October, those gains had been spectacularly erased: the MSCI RMS index, a total return index for equity REITs, was down 32.7% for the year-still 2.6% ahead of the Dow's 35.3% [decline]-a truly Pyrrhic victory.

We believe that the down draft is creating some very special buying opportunities for those with strong stomachs and cash on hand. It has also revealed those companies with staying power that have positioned themselves with holdings in defensive locations, with positive cash flow, low leverage, and a long-term outlook. For now, though, the most important asset to have on hand is patience and calm. It's not yet time to move, though that could come shortly.

Brookfield Asset Management (NYSE: BAM) [is a] large-cap diversified Canadian company with vast timber, hydropower, and real estate holdings. Even at today's lowered oil pricing, BAM's oil sands in Alberta spell profit in the energy sector. And it owns half of Brookfield Properties (NYSE: BPO), one of the top office-building owners in the US and Canada. BPO at present is the most vulnerable piece of BAM, but it, too, will outshine the downturn. Still, BAM offers a more rounded and deeper buy. (It changed hands below $19 Wednesday-Editor.)

Selling [around] $50 a share in the first weeks of October (it traded above $37 Wednesday-Editor), SL Green (NYSE: SLG) offered buyers a virtual steal on Manhattan's best-performing office buildings. Yes, building values and rents are both rolling downward, but there is a long way to go before this collection is worth less than at least $68 to $75 a share, at a minimum.

Even then, with this management in place and replacement costs for similar assets over the moon, SLG will be poised to pick up new growth.

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