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Shopping Centers Today -> May 2003
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REIT CONCERNS AIRED AT MID-ATLANTIC MEETING
BY DEBRA HAZEL
Retail real estate and REITs could be less attractive investments than they appear right now, cautioned speakers at ICSC’s Mid-Atlantic Idea Exchange in March.
Despite weakness in a number of retail real estate fundamentals, financing has been widely available, and capitalization rates remain historically low. Weary of volatility in other stocks, investors have fled to the security of regular dividends, and REIT share prices have reflected that. At press time major retail REITs, including Developers Diversified Realty Corp., General Growth Properties, The Mills Corp., The Rouse Co. and Simon Property Group, were trading near their 52-week highs.
But investors are funding an industry that faces some serious challenges, says Thomas S. Dreyer, chief investment officer of Trilogy Capital, a Kansas City, Mo.-based real estate hedge fund.
“The REIT market is a little ‘REIT dot-com,’” said Dreyer, likening the sector to the technology-oriented dot-coms that imploded at the start of this decade.
Historically low interest rates have driven investors seeking 6-to-8-percent returns over to REITs. As a result, REIT market capitalization has exploded from $8.7 billion in 1990 to some $160 billion today.
“Today, money is piling in every day, and that’s a little bit bothersome,” Dreyer said. There is a significant disconnect between current real estate fundamentals and the valuation of REIT securities, he says. Among the problems he cites are Kmart Corp.’s ongoing store closures, questions about consumer confidence in the face of the Iraq situation, and worries about terrorist attacks against malls, which would be “devastating.”
Meanwhile, the scandal surrounding alleged accounting irregularities at Dutch food and beverage giant Royal Ahold’s is worrisome to neighborhood center owners too.
“We’ve had a lot of fun with that, as you can imagine,” said Marty Cropp, a managing director and portfolio manager at Principal Capital Management, a division of Des Moines, Iowa-based Principal Global Investors. “With [Ahold’s] recent downgrade, the exposure limits have become more problematic.”
The dispute between Simon and Taubman Centers could have an impact too, Dreyer says. The Simon-Westfield America Trust partnership’s $1.74 billion ($20 per share) bid for Taubman is attractive, he says, and 85 percent of Taubman’s shareholders have tendered their stakes. But if the deal doesn’t go through, “it will be very negative for the industry,” he said. “It could scare REIT shareholders away” should they conclude that Taubman’s management wouldn’t act in their best interests.
Even so, he notes, retail remains the most solid sector, driven by actual consumer demand, with strip center REITs more correctly valued than other retail real estate companies. The real question is whether the current situation is merely part of a cycle, or represents a fundamental change.
“It’s hard to get a handle on it,” Cropp acknowledged, noting that the key industry aspect to watch will be replacement costs, as some anchors continue to fail. And competition from Wal-Mart remains an ever-present issue.
“I don’t think I can get through a loan committee meeting without someone asking about Wal-Mart,” Cropp said.
A rise in interest rates, too, could steer investors toward alternative investments.
“We’re nervous about the economy; we think things are soft,” Dreyer said. “We’ll wake up post-war and find we have the same baggage as before.”
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