I posted this on The PPT last week. Enjoy.
After mind numbing declines in commercial real estate shares, I think it’s important to draw a distinction between the “truly impaired” and those who are operating poorly. In commercial real estate, over the next 4 years, a staggering amount of debt is due, as well as expiring lines of credit. Like the banks, most of these names are highly levered and dependent upon entities for capital. Being that the CMBS market is shut down, it is vital for real estate companies to secure lines of credit and proper refinancing. However, due to the state of banking, this is a next to impossible task, at the present.
One very important topic, which is not being talked about, is the tenuous position of life insurance firms. Most people are unaware, but life insurance firms, traditionally, have been a very reliable source of capital for real estate companies. Due to recent write downs in the insurance industry, many of the big players have announced the suspension of lending to commercial real estate firms. In total, more than a dozen firms have announced cut backs in lending, including: Aegon, Allstate, Hartford, Northwestern, Principal, Nationwide, Genworth, Sun Life and Protective Life. Annually, insurance firms provide anywhere between $20-25 billion in financing. That number should drop by at least 35% in 2009.
In order for the REIT industry to deleverage to traditional levels, it is estimated they will need to raise $95 billion in financing in 2009. Going out a few years, that number balloons into the 100’s of billions. Thus far, in 2009, cre firms have raised just $386 million in equity, compared to $5.2 billion in ‘08 and $6.7 bill in ‘07. In other words, they will not be able to fill the massive gaping holes in their respective balance sheets, via dilutive secondary offerings. They will be forced to sell valuable assets at fire sale prices and/or secure huge lines of credit from a beleaguered banking industry. Most likely scenario: the government will bail them out.
Here are some notes on a variety of real estate names:
PSA: Balance sheet is fairly good. The company retired $200 mill in debt, at a 35% discount. With less than $30 mill in maturities, over the next two years, and more than $1bill in cash, PSA will be a survivor.
BXP: Adversely affected by carnage in the finance sector. They have a little more than $600 mill due, over the next two years, and another $1.8 bill due between 2011-2012. They will likely need to raise capital, after 2010.
OHI: Excellent balance sheet. They are well positioned to withstand the current environment, with only $48 mill due, over the next 4 years and a $400 mill line of credit, OHI will survive.
MAC: Great assets, horrendous balance sheet.With $552 mill due in ‘09, $765 due in ‘10 and more than $3.2 bill due between 2011-2012, MAC will need a miracle to stay alive. At the present, they have total cash of $170 mill and a line of credit of $370.
SLG: The market is pricing in a “Draconian Scenario” for NYC cre. Between ‘2009-2011, SLG has more than $1.5 bill due. The real test will come in 2012, when more than $2.3 bill comes due, with another $3.5 bill due thereafter.They will need to raise capital, after 2010.
FR: Terrible balance sheet. The company will need to raise a significant amount of capital, over the next 2 years. They were especially affected by the Circuit City bankruptcy, with more than 1.3 mill sq. ft. of space being vacated, as a result. FR needs to raise more than $500 mill in new capital, by 2011. Then in 2012, they have another $649 mill due. With $25 mill in cash and a limited line of credit, I think it’s safe to say: FR is toast.
FUR: Stupid management. They have a total of $4.4 bill in debt and they think it makes sense to buy beaten down REIT stocks, on the open market. The company bought 3.5 mill shares of LXP @ $5.60. They have a common stock portfolio of about $30 mill, up from $1 mill in ‘08. In other words, they just started buying stocks. Why? They have cash of $73 mill and a line of credit of $100 mill. However, they exhibit stupidty on a grand scale, over a number of years. A few years back, in ‘06, they entered into a partnership with Concord Ventures, dropping $162 mill into the deal. As of last qt., that investment was worth less than $73 mill.
AKR: No maturities due until 2011. The company has 3 projects in development, total cost of $206 mill. They will survive.
BKD: A $230 mill credit facility shrinks to just $75 mill by June of 2010. With over $700 mill due in ‘09, BKD looks toasty.
LTC: Decent balance sheet, with $100 mill line of credit, no development costs, and just $31 mill due in maturities through 2011. However, if you look a little closer, you will find 25% of their portfolio is close to default, with SRZ and ALC as egregious tenants.
FRT: Grocery anchored portfolio, heavily shorted. With close to $400 mill due, over the next two years, and only $175 mill in cash, including a line of credit, it’s safe to assume, FRT will need to raise a lot of cash. In addition, between 2011-2012, they have another $450 mill due.
EXR: Liquidity concerns. Due to economic environment, the self storage space has endured significant declines in occupancy. The company had about $500 mill in capital needs, over the next two years, with $240 mill in cash, including a line of credit. Looking out into 2011-2012, they have another $300+ mill due in maturities. If they are not bought out by PSA, they are toasty.
VNO: Keep an eye on the Hotel Penn and Farley Post Office sites. Should they land a solid tenant, the stock will rip higher. Analysts are a bit overzealous in their occupancy assumptions of 95% and 94%, for 2009 and 2010. The company is richly capitalized, via exorbitant lines of credit. With more than $9.5 bill in debt due, from 2009-2012, they most certainly will need the banks to buttress their balance sheet. With approximately $4.5 bill in cash, including a $2.2 bill line of credit and $500 mill in projected free cash flow, VNO will start to run out of money by 2011, providing the current environment does not rebound.
PLD: This company is doomed. They have a $3.2 bill line of credit expiring in 2010 and more than $5 bill due by 2012. With only $975 mill in cash and a $1.2 bill line of credit, they will need to raise significant capital.
SNH: With only $3 mill due, over the next two years and $400+ mill in cash, including a line of credit, SNH will survive.
ACC: With more than $550 mill due from 2009-2012, and only $180 mill in cash, including a line of credit, ACC will need to raise a lot of money or go away.
CBL: More than $1bill needed, over the next two years and less than $200 mill in cash, CBL is going to zero. No doubt.
WRI: With approximately $1.9 bill due from 2009-2012 and $280 mill in cash, including line of credit, WRI is stuck inside a murderhole. They will need to raise more than $500 mill, within the next 12 months.
GGP: Done. The repercussions of them defaulting on nearly $28 billion in debt will be felt.
KIM: They need to raise $400 mill by 2010.
TCO: Not as bad as their peers. They should survive.
PEI: With more than $1.2 bill due by 2012 and less than $90 mill in cash, PEI will default, barring divine intervention. They need to raise $1bill inside of 18 months.
ESS: Not a terrible balance sheet. Nonetheless, they will need to raise capital by 2010.
EQR: As of now, they have a decent balance sheet. However, within the next 4 years, more than $3.9 bill in debt is maturing. If they are unable to refinance, the company may start to run low on cash by late 2010.
HME: With over $850 mill due inside of 4 years and less than $150 mill in cash, including a line of credit, HME is heading towards insolvency and its shareholders don’t even know it.
UDR: They need money right away. They will need to raise at least $400 mill by 2010.
CPT: Big Texas exposure. With more than $2 bill due by 2012 and only a $445 mill line of credit to rely on, CPT need to raise capital or sell off assets. Either way, it will be dilutive.
SPG: They have over $3bill in cash, including a line of credit and a little more than $12 billion due from 2009-2012. In the near term, the company is adequately capitalized, considering the company generates significant free cash flow. However, after 2010, providing the commercial real estate market has not recovered, the company will need to sell assets or refinance their debt, in order to meet debt payments.
DDR: Another retail REIT with a horrendous balance sheet. They have more than $5.4 bill due from 2009-2012 and a little more than $250 million in cash, inclusing a line of credit. The company still enjoys decent free cash flow. However, they will need to come up with a cool $1bill by 2010, in order to meet debt payments.
Bottom line: Right here, right now, I am unveiling my revised “Reverse Four Horsemen of Certain Death.” BEHOLD: MAC, WRI, ACC and HME.
UPDATE: Send your bills to the Fed![youtube:http://www.youtube.com/watch?v=DRper3L6xN8 450 300]