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REITs Take Tepid Approach in 2010 - 02/18/10
By: Les Shaver

The REITs want to be more active in 2010 than 2009. No one is sure just how much, though. Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm, says the REITs have announced guidance for $2 billion to $2.5 billion in acquisitions this year, after tallying less than $500 million last year. Already, they’ve closed on about one-half to one-third of the $2 billion to $2.5 billion target, however, according to the firm.

“They’re getting more aggressive,” says Andrew J. McCulloch, an analyst for Green Street Advisors. “The total dollar amounts embedded in 2010 guidance are still pretty conservative compared to what they’ve done in the past, and considering how much is already closed or under contract, I wouldn’t be surprised if they exceed their initial acquisition guidance.”

Chicago-based Equity Residential is driving a lot of the activity. Its three-property acquisition from New York-based Macklowe constituted about $500 million of the total, according to Green Street. “Aside from the deals Equity did, there haven’t been a lot of guys dipping their toes in the water,” says William Acheson, a REIT Analyst with New York-based Benchmark Capital.

Other companies would like to buy, but they’re not ready to step out on a limb in their acquisition guidance. Part of that is uncertainty over their ability to close, given the competition for apartment assets—a theme that was echoed on a number of REITs' fourth-quarter 2009 conference calls. Houston-based Camden, for instance, expects to buy $0 to $100 million on balance sheet and $200 million to $500 million in its joint venture. Palo Alto, Calif.,-based Essex Property Trust projects $0 to $300 million in acquisitions, and Memphis-based Mid-America Apartment Communities projects about $150 million of acquisitions on its balance and $150 million in its joint venture. Neither Denver-based UDR nor Arlington, VA-based AvalonBay Communities assumes any acquisitions in its guidance, according to Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm.

“Some companies gave guidance that didn’t include any acquisitions or asset sales,” says Paula Poskon, a senior research analyst with Robert W. Baird. “But that doesn’t mean they’re not looking.”

REITs could also increase their acquisition outlooks if they sell. For instance, Equty has said that outside of some of its portfolios on the market in North Carolina and New England (not including Boston), it will sell only if it can recycle that capital into new deals in high-barrier markets such as Washington, D.C., or New York. Most other apartment companies also seem to be taking a tepid approach to sales, all except AIMCO, which is finishing up its disposition program.

Development is another way to add product, but with few exceptions, most REITs are taking a wait-and-see approach to new groundbreakings. Alexandria, Va.-based AvalonBay Communities, however, plans to start $400 million of the $1 billion in development the REITs are expect to start in 2010. “AvalonBay will never shut down completely,” says Rod Petrik, managing director at St. Louis-based Stifel, Nicolaus and Co., a regional brokerage and investment banking firm. “That’s who they are. Their roots are in merchant building. Their pipeline may be one-third of what it was, but it’s still there. I think you’ll see them add more [to the pipeline] as they move forward this year.”

Others aren’t so aggressive. Equity plans to build onto a plot of land it's leasing in New York, while Camden actually took a write-down charge of approximately $85.6 million in the fourth quarter of 2009 for eight future projects that it plans to put on hold. It currently has five wholly-owned land parcels held for future development that are not affected by this write-down, but the firm won’t start any new developments during the first half of 2010. Overall, the company is projecting up to $150 million in development starts. UDR, meanwhile, is projecting no starts.

“Some of the other REITs are out there saying that they might start one or two projects,” McCulloch says. “There’s nothing specifically in their guidance, but if demand continues to firm they could start projects in the second half of the year.”