Retail REITs Pursue Stock Offerings in a Darwinian Battle of the Balance Sheets (6/3)
Jun 3, 2009 4:38 PM, By Elaine Misonzhnik
Taking care of business
All those transactions, however, are still some way off as the REIT's immediate focus will be on cleaning up and renegotiating existing lines of credit and paying down property level debt, notes Mason. The lines of credit are "their lifeline, their everyday operating capital," he says. And both lenders and analysts remain anxious about over-taxed credit lines.
For example, Glimcher Realty Trust, a Columbus, Ohio-based regional mall REIT with a 21.7-million-square-foot portfolio, ended first quarter with $392 million outstanding on its $470 million credit facility. The facility expires at the end of this year, with an extension option until December 2010, but Glimcher is in danger of default if it doesn't meet certain performance covenants, related in part to the company's overall leverage level and the amount of recourse debt on its books. (Glimcher has so far refused to discuss the covenants in detail). Glimcher executives are currently in negotiations with lenders to extend the facility past 2010, but even if they succeed, the credit capacity on the line will likely be reduced to less than $200 million, according to Rich Moore. As a result of such concerns, Standard & Poor's rating agency recently downgraded Glimcher's corporate credit rating to a B+ from BB-.
Selling stock might be one way for Glimcher to tackle the problem, though during the company's earnings call on Apr. 23, chairman and CEO Michael Glimcher noted that the REIT's current share price ($2.89 as of June 3) precludes that option for the time-being. Instead, Glimcher hopes to generate $35 million in additional cash this year by reducing its common stock dividend to $0.10 per share. A number of other REITs, including Regency Centers, Inland Real Estate Corp. and Weingarten Realty, have also reduced or suspended their dividend payments for 2009. Several firms, including Simon and Developers Diversified Realty (NYSE: DDR), a Beachwood, Ohio-based shopping center REIT with a 155-million-square-foot portfolio, are paying dividends through a combination of stock and cash.
In addition, Glimcher (and other firms that are battling leverage levels above 60 percent) has been looking at the possibility of asset sales and joint venture transactions on existing properties. There is some interest in the market for those kinds of deals, according to Michael Glimcher, but there appears to still be a 100 basis point to 200 basis point gap between buyers' and sellers' expectations, which means a surge in actual transaction activity is some months away. What's more, Glimcher expects that the company would have to give up control of some of its best properties to achieve its capital needs. "It's more likely that we'd look at doing something with a higher quality asset based on where the environment is today," Glimcher said.
One firm that seems to have come up with a revenue-generating strategy outside of asset sales and joint ventures is CBL & Associates Properties, Inc., a Chattanooga, Tenn.-based firm with an 83.6-million-square-foot regional mall portfolio. On May 11, the REIT announced plans to expand its third party management business. As of December 2008, CBL managed 2.2 million square feet of non-CBL owned space.
CBL executives declined to discuss revenue projections for the expanded business.
The company has already reduced its quarterly dividend payments and has opted to pay the dividend through a combination of 60 percent stock and 40 percent cash. It's currently considering common stock offerings, joint venture transactions and asset sales as other cash-generating measures. CBL has a debt to total market cap ratio of 81.69 percent and a total long-term debt load of $6.6 billion.
Weeding out weaker REIT players
On the other side of the fence are companies with fortified balance sheets—Simon, Kimco, Federal, Taubman Centers (NYSE: TCO), Regency, Acadia—that are waiting for asset prices to drop low enough for acquisitions to turn into virtual steals. In fact, first quarter earnings calls separated the retail REIT sector into three distinct groups, including firms whose forward-looking statements centered on the word "opportunity;" those that talked about the possibility of asset sales and joint venture transactions as a way to provide an extra level of comfort in respect to their leverage levels and those that were focused on curing liquidity concerns by any means available.
If credit conditions won't loosen up considerably before the end of 2009, the latter will likely become acquisition targets for their larger rivals. The industry might not see another General Growth-like bankruptcy, but there might be REITs that will be dismantled piece by piece as they try to sell assets to pay down debts, says Grupe. Others might be swallowed whole. Speaking at New York University's 14th annual REIT symposium in early April, Samuel Zell, chairman of Equity Group Investments, LLC, noted that some REITs might no longer find it beneficial to remain in the public markets. But few private sector investors seem eager to take on the risk of buying out a REIT right now, says Mason. So most mergers and acquisitions activity would likely take place between the publicly traded REITs themselves.
"Whoever can amass the most capital for [mergers], they are the ones who'll get bigger and survive," Mason notes. "My guess is we'll end up with a handful of bigger, stronger retail REITs."
The process might begin in late 2009, according to Grupe, but it will be another two to three years before the repositioning is completed. First, there would have to be some movement in the credit markets and a closing of the bid/ask gap that currently remains considerable.
"I think the ingredients that are required for [consolidation] to take place are not yet in place," Grupe says.
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