REIT Earnings Disappointing

Two of the largest REITs, Simon Property Group and Vornado Realty Trust, reported earnings results this morning. Contrary to the recent surge in their shares, which would imply that REITs were having a bang-up quarter, both posted losses, sharp declines in FFO, and lower vacancy rates amid deteriorating fundamentals in the commercial real estate market. Simon Property Group posted a $14.1 million loss on a $140. 5 million write-down, compared with a year ago profit of $114.4 million. Funds from operations fell to 96 cents from $1.49 last year. Revenue decreased 11% to $903.6 million. Occupancy rates were down to 90.9% while average rents rose 3.8%. Vornado Realty reported a loss of $37.6 million on a $122.7 million loan loss, compared with a year-earlier profit of $131.1 million. Funds from operations declined to 54 cents a share from $1.19. Revenue was slightly higher by 0.6% to $678.4 million. Occupancy rates fell to 96.1% from 97.5% in New York offices, but rose to 95.4% from 93.9% in DC. The loan loss was related to the company's 33% interest in Toys "R" Us which the REIT helped take private in 2005.

What is with all the recent bullishness in REIT stocks? The WSJ had a front page story yesterday questioning the rally in the sector. According to the article, REITs face $152 billion in debt maturities through 2013 while commercial property values have plummeted and seem likely to continue to do so. The most compelling reason to buy REITs in an environment where asset values are declining has been the yield, which during the lows hit roughly 10%. But at current prices, yields are roughly 4.7%, lower than some corporate bonds. Certainly the bulls will throw out the argument of 4.7% yield plus all that upside appreciation potential. But with the way the commercial real estate market looks today, the days of appreciation in commercial real estate properties are very far away. So if you think a 4.7% yield is "juicy", go buy some long bonds.

JP Morgan Earnings Vs GGP Bankruptcy

JP Morgan posted that profit it has been promising on the heels of Vikram Pandit’s leaked “we’re actually making a profit” memo in early March. JP reported $2.14 billion in profit, or 40 cents a share, beating analysts consensus of 32 cents a share. The bulk of the profits came from fixed income trading which added $4.9 billion in profits to the investment bank’s total take of $8.3 billion. In the “troubling” department, credit loss provisions nearly doubled to $8.6 billion, rising 18% from the fourth quarter. Credit card default rates surged to 7.72% from 5.56% in the fourth quarter and 4.37% in the prior year’s first quarter, while charge-offs rose to 4.9%. Can JP, in addition to all the banks, continue to out-earn their charge-offs and credit loss provisions with fixed income trading profits? The market seems to think so for the moment, having bid up JP’s shares to nearly double their price a mere month ago. I have my doubts.

Meanwhile, in Retail REIT World, General Growth Properties finally filed for bankruptcy protection. I suppose that debt investors have finally grown weary of not receiving interest payments and pushed the company to file Chapter 11. The company’s stock had been trading around $1, so this has not been too much of a surprise. What may come as a surprise to investors is the actual value of the REIT’s assets, which were listed in the filing at $29.3 billion versus liabilities of $27 billion. Anybody want to buy a mall? I hear they might be selling at a discount.

Commercial Real Estate Fundamentals Deteriorate Rapidly

The apartment vacancy rate for the top 79 US markets jumped to an average 7.2%, a full percentage point increase over the past two quarters and the highest level since the first quarter of 2004, according to Reis Inc, a New York real estate research firm. Asking rents, which exclude concessions fell 0.6%, while effective rents declined 1.1% in the first quarter. Among CMBS, the multifamily sector posted the highest delinquency rate in February, reaching 3.3%, from 3% in January, according to S&P. Some $3.2 billion in multifamily debt was delinquent in February, up from $1.5 billion in the third quarter of 2008. Yikes.

Meanwhile, over in the retail sector, conditions aren’t much better. The amount of occupied space in US shopping centers and malls declined a net 8.7 million square feet in the first quarter of 2009. The amount of occupied space lost in that one quarter was more than the total amount of space retailers gave back to landlords in all of 2008 and any other year in recent history. The decline in occupied space pushed the vacancy rate for malls and shopping centers to 9.1% in the first quarter from 8.3% in the previous quarter. It is now the highest rate since the 1990s. Mall lease rates slid 1.2% and those at shopping centers (think strip malls) fell 1.8%.

It’s no wonder that the REITs were pummeled in yesterday’s trading session. Not only are things bad for the nation’s landlords, but they’re getting worse at a faster rate. Optimistic REIT investors have piled into the stocks in recent weeks, eager to snap up shares in secondary offerings despite the fact that most REITs carry significant debt loads and are opting to pay dividends in stock rather than cash. Personally, I like my dividends paid in cold hard cash, and prefer that any stock I purchase in the middle of the worst credit crisis since the Great Depression to have a debt to equity ratio below 0.5, instead of, say, 6.9 (i.e. SPG.)