REIT Rally Facing a Challenge

Discussion in 'Stocks' started by ASusilovic, Aug 2, 2009.

  1. While housing may be nearing a bottom, commercial real estate likely has much further to fall. And that could snuff out a significant rally in real-estate-investment-trust stocks.

    REITs, which own everything from office buildings to strip malls, have seen their shares rocket 60% since hitting an 18-year low on March 6.

    Now REITs face at least two years of crushing debt maturities, sliding property values, dwindling occupancy and weakening earnings. These are major obstacles for their shares to overcome.


    REITs must refinance a daunting $152 billion in debt through 2013. Some REITs have crushing debt levels, such as office landlord Maguire Properties, with 94% debt to capital. Anything much above 60% is considered onerous. Another office REIT, Kilroy Realty, has had tenant outflows that have whittled away its occupancy rate to near 85% -- the minimum level allowable under its loan covenants. Kilroy had to get its banks to waive them.


    The bullish view on REITs is that many of them have gone through the worst, and 2010 should mark an upturn. The spate of recent capital raisings "bought them time to get through the recession," says Tom Bohjalian, senior vice president at Cohen & Steers, a real-estate investment firm.

    As a whole, however, the sector doesn't look cheap any more. A big reason to buy REITs, their superior dividend yields, has worn away, thanks to rising share prices. In the spring, yields averaged around 10%, says researcher SNL Financial. Now they are down to 4.7%, below many investment-grade corporate bonds.

    Below investment grade bonds ? ooppsss...