Commercial Real Estate: Think Twice, It's Still Not All Right

by Mike Pienciak - April 14, 2009 - 0 comments

In the past month or so, a number of commercial real estate investment trusts (REITs) -- including Kimco Realty (NYSE: KIM), Simon Property Group , AMB Property (NYSE: AMB), and Alexandria Real Estate Equities (NYSE: ARE) -- have announced plans to strengthen their balance sheets by issuing shares. The presence of apparently willing buyers may suggest that the commercial property market is starting to stabilize, but that looks to me like a hasty conclusion.

Consider the following facts and forward estimates from a recent Deutsche Bank (NYSE: DB) presentation:

Granted, a broad view can obscure individual situations, but the picture doesn’t necessarily improve at the company level.

Simon Property Group, in particular, looks to be in danger of
holding unrealistically high expectations. On the fourth-quarter 2008
conference call, management predicted flat to slightly better financial
performance in 2009. Baked into that estimate is the savings that will
come from the decision to pay 90% of the dividend in stock, but the
view still seems to suppose that leases can generally be renewed at
historic rates. Meanwhile, investors have received a mall-style dilution special -- first, via the dividend change, and more recently, by the 17.25 million-share offering.

From an investing standpoint, I'd be hesitant to get involved with
any of the mentioned stocks. If business prospects worsen, further
dilution is a likely scenario. In that case, buyers may demand lower
prices, which would mean that companies would need to sell a greater
number of shares to reap the same proceeds.

Nonetheless, I understand that investors may feel anxious to get in
on an eventual recovery in the commercial real estate market. In that
case, a better play could be online marketplace provider LoopNet
(Nasdaq: LOOP). The company carries no debt, recently raised additional
cash through issuing convertible preferred shares (a scenario that
poses little risk of repeat, in my view), and should see the same, if
not greater, upside as commercial REITs once offices and malls
decisively shed their poker chip personas.

Rent some related Foolishness:

Will Real Estate Lead the Recovery?Dream Stocks for Real Estate InvestorsOases of Value in the Real Estate Desert

Last edited by Harpreet Bhagrath on Tue, 04/14/2009 - 10:22 | Write to author: Mike Pienciak |