REIT Investors Nervous?

mall-aerial-photo.jpgOne of the big news items I read recently talks about a company called General Growth Properties. They’re a Chicago-based mall developer. The focus is on comments in one of their recent ‘risk factor’ disclosures.

Here’s how it read: “Our substantial indebtedness could adversely affect our financial health and operating flexibility”.

While a lot of investors cavalierly disregard such comments as ‘boilerplate risk factor’ disclosures, people are starting to pay attention. Even locally we can consider cautious steps prudent in the current REIT investment marketplace with Centro Properties Group seeing their stock price nearly wiped out in recent weeks.

Centro is an Austrailian shopping center operator, which manages almost 700 shopping center properties in the U.S., including the Superior Marketplace which is home to Target, TJ Max, Whole Foods (formerly Wild Oats), Costco and others.

Among large, activly traded real-estate investment trusts, General Growth Properties is showing a higher than average debt relative to assets and capitalization as compared to other companies. The difference with the General Growth debt is that it’s not tied to public cebt markets with more conservative balance sheets like most of it’s peers such as Simon Property Group.

Instead, General Growth’s debt is in the form of old-fashioned mortgages and construction loans that are secured against specific malls. When you consider that General Growth would, from time to time, dip into the mortgage-backed-securities market, you know the dilemma if you’ve been reading anything at all about the national real estate market and what’s been happening with mortgage-backed securities

Steven Marks, managing director of the REIT group at Fitch Ratings, rates the General Growth Properties debt as “junk” due to the company’s approach to financing which made General “more risky than its peers,” Marks says in a WSJ article.

The word is that companies like Centro and General Growth get into trouble when they face lots of maturities over a short period of time… in a weak national market.

General’s performance was one of the best over the past five years and peaked at about $67 last March which was nearly four times what it was in about spring of 2002 or there-abouts. In mid January its shares had fallen by about half to $32.86 which is a harder fall than many other REITS.

The REIT pathway that seemed like a no-brainer to some during the last few years has shown that it too, like many other investment opportunities, comes with potential risk that a few of you thought didn’t exist.

Having said all that, apparently Merrill Lynch analyst, Steve Sakwa, upgraded the stock to a ‘buy’ saying that he thought the stock’s decline over emphasized the concerns some had about General’s ability to refinance its debt.

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