REIT Growth Rate Expected to Taper Off
Property acquisitions by real estate investment trusts tumbled 39% to $8.08 billion in the third quarter, the lowest level since the start of 1997, as a slump in REIT shares makes it harder to finance purchases.
The pace of acquisitions is down from $13.3 billion in the second quarter and below the record $23.9 billion in the fourth quarter of last year, according to the industry trade group National Assn. of Real Estate Investment Trusts. The level is the lowest since REITs bought $7.85 billion of properties in the first quarter of 1997.
The drop-off portends a slowing in earnings growth for REITs, which in recent years banked on acquisitions to boost earnings 15% or more. Now, the industry’s growth rate is expected to fall to 12.5% this year, 11% in 1999 and under 10% in 2000, according to analysts.
“We would expect acquisition volume to remain much more moderate than in previous years,” said Michael Grupe, director of research at the Washington-based REIT association.
REITs own everything from trophy office buildings in Manhattan to California shopping malls, even prisons in Oklahoma. They are exempt from corporate income taxes if, among other things, they distribute at least 95% of net income to shareholders as a dividend.
The drop in acquisitions comes amid an 18.4% decline in the Morgan Stanley REIT Index this year, compared with a 1% gain in the Standard & Poor’s 500 Index. Unlike in past years, REITs are now largely unable to sell stock and use the proceeds to help finance property acquisition.
“Deals that REITs have agreed to are blowing up,” said Jacques Gordon, director of real estate research at ABKB/LaSalle Securities, which has more than $1 billion invested in REITs.
One example is Fort Worth-based Crescent Real Estate Equities Co., headed by billionaire investor Richard Rainwater, which last month backed out of an agreement to buy three office properties for $465 million as its stock fell 39%. Also last month, Prime Group Realty Trust of Chicago called off an agreement to buy two office buildings for $356 million.
On Monday, San Francisco-based TriNet Corporate Realty Trust, whose shares are down about 16%, said it cut its acquisitions staff by half.
The drop in REIT stocks corresponds with a slowdown in the economy. Many investors expect that demand for office and warehouse space will soon waver. And as consumers become more worried about possible layoffs, they are likely to rein in spending and cut back on trips to the local mall, keeping retailers from expanding and making it harder for landlords to raise rents.
Even lenders are jittery.
Total real estate lending by commercial banks fell from $38.7 billion in the first four months of the year to only $9.2 billion from May through August, according to Paine Webber Group Inc.
To be sure, some REITs are finding new ways to grow. First Industrial Realty Trust Inc., Rouse Co. and Developers Diversified Realty Corp. all recently formed joint ventures with deep-pocketed pension funds.
Others are persuading sellers to take shares priced at steep premiums to the current market price.
As part of its purchase of San Francisco office and retail complex Embarcadero Center for $1.22 billion, Boston Properties Inc. will issue one of the sellers, David Rockefeller, securities that are convertible into common shares at a premium of 31% above the current market price of its common shares.
Equity Office Properties Trust, the U.S.’ largest owner of office buildings, is another REIT that has completed similar transactions.
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The REIT Track
Here is stock information on 28 real estate investment trusts based in Southern California. Shown are the stocks’ closing prices Friday, high and low prices for the last year and current dividend yield. The current yield is based on dividends paid over the last year, but that may not be indicative of the dividends a REIT will pay in the future. Investors should research individual REITs before considering a stock purchase.
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Ticker Friday Southern California REITs symbol Exchange close Low* High* Alexandria Real Estate ARE NYSE $28.13 $25.19 $34.56 Equities American Residential INV NYSE 6.25 4.75 16.75 Investment Angeles Mortgage ANM Amex 18.06 16.13 19.88 Investment Trust Apex Mortgage Capital AXM NYSE 9.94 9.06 15.00 Arden Realty ARI NYSE 21.63 19.75 32.38 Burnham Pacific Properties BPP NYSE 13.75 12.44 15.75 Center Trust ACH Amex 12.13 10.81 18.25 Excel Realty Trust XEL NYSE 26.63 21.50 35.63 G&L; Realty GLR NYSE 15.69 14.50 21.75 Health Care Property Investors HCP NYSE 32.44 29.56 40.38 IMPAC Commercial Holdings ICH Amex 10.56 8.81 19.75 IMPAC Mortgage Holdings IMH Amex 11.19 10.00 18.50 Imperial Credit Commercial ICMI Nasdaq 9.88 8.56 19.13 Mortgage IndyMac Mortgage Holdings NDE NYSE 19.31 17.38 27.19 Irvine Apartment Communities IAC NYSE 26.00 23.00 33.50 Kilroy Realty KRC NYSE 21.81 18.50 30.00 LTC Properties LTC NYSE 16.94 16.25 21.94 Macerich MAC NYSE 25.69 22.25 30.38 National Golf Properties TEE NYSE 27.00 22.88 33.69 Nationwide Health NHP NYSE 22.13 19.38 26.94 Properties Pacific Gulf Properties PAG NYSE 19.94 18.38 24.31 Pan Pacific Retail Properties PNP NYSE 18.38 16.50 22.75 Price Enterprises PREN Nasdaq 5.00 2.25 20.25 PS Business Parks PSB AMEX 20.88 18.44 26.63 Public Storage PSA NYSE 26.38 22.63 33.63 Realty Income O NYSE 24.69 23.44 27.38 Sunstone Hotel Investors SSI NYSE 8.94 8.31 18.19 Westfield America WEA NYSE 16.63 14.25 18.75
Southern California REITs Yield Alexandria Real Estate 5.69% Equities American Residential 17.92 Investment Angeles Mortgage 7.09 Investment Trust Apex Mortgage Capital 10.87 Arden Realty 7.77 Burnham Pacific Properties 7.64 Center Trust 11.88 Excel Realty Trust 7.51 G&L; Realty 9.94 Health Care Property Investors 7.95 IMPAC Commercial Holdings 17.04 IMPAC Mortgage Holdings 17.52 Imperial Credit Commercial 9.92 Mortgage IndyMac Mortgage Holdings 10.20 Irvine Apartment Communities 5.92 Kilroy Realty 7.43 LTC Properties 9.21 Macerich 7.16 National Golf Properties 6.37 Nationwide Health 7.59 Properties Pacific Gulf Properties 8.43 Pan Pacific Retail Properties 8.27 Price Enterprises 28.00 PS Business Parks 4.79 Public Storage 3.34 Realty Income 8.14 Sunstone Hotel Investors 12.31 Westfield America 8.54
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*52-week range
Source: Deloitte & Touche and Bloomberg News
