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WHITE KNIGHTS WANTED

The roiling commercial-mortgage-backed securities market has caused some smaller private developers to lose crucial financing and put their projects on hold, leaving tenants holding the bag. At Spring Convention, the biggest public landlords say they heard from several such retailers. “It’s becoming more difficult for these people to deliver on time, and tenants have seen a lot of overcommitments,” said Daniel Hurwitz, president and COO of Developers Diversified Realty Corp. Even the private developers themselves showed up at these big companies’ doors during the show, seeking partners for planned projects that are starting to fall apart. “A lot of new deal flow came in the door on the development side,” said Scott Wolstein, CEO of Developers Diversified. “A lot of that was occasioned by the fallout in the CMBS market. Developers are nervous about going it alone.”

REITS: WALL ST. DISSES US

Misguided investors continue to undervalue REIT stocks and create a situation where private capital can scoop up all the prime properties, observers say. “We’re allowing great properties to be stolen out from under our noses,” said James Corl, executive vice president and chief investment officer of Cohen & Steers’ real estate securities portfolios, at an investor conference in June. “The private market has the values right, the public markets have it wrong.”

One problem is that REIT investments are often handled by the youngest asset managers, while the more experienced ones handle software company investments or something more “fun and sexy” than REITs, says Lou Taylor, a REIT analyst at Deutsche Bank. When Taylor tried to persuade investment managers to put money into major retail REITs, the responses included: “ ‘If I want a 4 percent yield, I’ll buy Citigroup or JPMorgan. I’ll get more liquidity, and I won’t have to learn anything new,’ ” he said. In the meantime, said Corl, “major pension funds that have very sophisticated direct investment sides of the shop and are happy to go into a fund and buy the stuff direct don’t use that intelligence on their equity side to invest in REITs. And I’m talking big names.”

FIE ON FFO

The funds-from-operations metric may be hurting REITs. The REIT community introduced the FFO to help investors unfamiliar with the intricacies of real estate cash flow. FFO is determined by adding up a REIT’s net income, depreciation and amortization, and then subtracting the gains on property sales. But FFO is inconsistently calculated and reported, some say, and should not be used as a catchall for REIT valuation. “We created our own metric, then gave it to inexperienced people to use and never showed them what was inside the metric,” said Don Wood, CEO of Federal Realty Investment Trust. Yet another problem is that “the metric is diverting attention away from the subsidy,” said Wood. “Everybody wants to talk about cap rate; nobody wants to talk about customer relations, the franchise you’ve created and hence the undervaluations of REIT stock.”

DEAL BAROMETER: WHO IS PAYING HOW MUCH FOR WHAT (PDF)