ews wrap
REIT Share Prices Plunge
As Stock Market Nosedives
ProLogis Clarifies
Repositioning Plan
Battered by the ongoing stock market
freefall, REIT share prices have plunged
in recent weeks, resulting in slashed divi-
dends and high-level management
shakeups at some of the biggest names
in the industry. Public real estate services
firms have been hit as well. (See “Q3
Revenues Drop for CRE Service Firms.”)
REITs, until recently, escaped the
impact of the capital markets and gen-
eral economic woes throughout 2008.
The intense drubbing financial mar-
kets took in September
and October, of course,
changed that. “Investors
must accept that REITs
strong balance sheet and access to capital, Adornato says. A company’s leverage
load also comes into play, especially if it
must refinance in the upcoming year.
“It’s not only the absolute level of debt,
but also the timing of when it matures,”
he relates. “A company that has low
leverage, but has most of its debt expiring in 2009, could still be in a difficult
position.”
Industrial and office property owners
could be in for the rockiest time.
“Industrial depends on the overall volume of international trade, exports and
imports,” Adornato says. “Given the
slowdown in the global economy, there’s
“Accessing the public equity
markets does not make sense for
the vast majority of REITs.”
PAUL E. ADORNATO, BMO CAPITAL MARKETS
are now increasingly price sensitive to
broader market movements,” according to an Ernst & Young Global REIT
report released at the end of October.
They “can no longer be considered a
safe counter-cyclical investment.”
A November update from NAREIT
reports that between January and
October, REIT total returns slumped
31%, mirroring the decline in the broader stock market. The financial crisis “has
greatly changed the landscape for all
real estate companies, including REITs,”
says Paul E. Adornato, senior REIT analyst at BMO Capital Markets in New York
City. With tighter capital markets conditions, he says, “accessing the public
equity markets does not make sense for
the vast majority of REITs, and it’s possible that the equity markets will remain
unfriendly to them for the foreseeable
future.”
With the stock market in disarray, the
emphasis is now on companies with a
going to be less coming in and going
out, which is not a good indicator for
warehouses. Another sector that could
be at risk is office, as job cuts become
more prevalent, especially in financial
services, insurance and real estate—the
FIRE categories. These sectors are large
users of office space and all of them are
expected to continue to suffer.”
Moody’s Investors Service recently
revised its unsecured debt outlook
from stable to negative for two industrial companies, ProLogis and AMB
Property Corp. In the case of
ProLogis, Moody’s cites slower leasing velocity, earnings volatility, debt
maturities coming due next year and
in 2010 and a sizable development
pipeline in a weakening global economic environment. (See “ProLogis
Sheds Light On Repositioning Plans.”)
AMB faces pressure on earnings
growth due to a decline in develop-
REITS continued on page 12
Rapid expansion, a maturing debt load
and dire economic conditions have
undermined ProLogis’ financial strength,
necessitating its repositioning, according
to Walter C. Rakowich, the firm’s newly
named chief executive officer. He replaces Jeffrey H. Schwartz, who recently
resigned after three years at the helm of
the Denver-based REIT.
“We expanded too quickly and did it
on our balance sheet,” Rakowich said at a
press conference
held earlier this
month at the New
York Palace in
Manhattan.
ProLogis has
some $3.5 billion of
debt maturing
through 2010, with RAKOWICH:
$250 million com- “Nothing is
ing due next off the table
August. To free up relative to 2009.
liquidity, the firm is We will review
slashing its dividend all alternatives.”
from the previously
announced rate of
$2.28 per share to $1 per common share
for 2009. Rakowich estimated the action
would save the firm $290 million in cash.
Construction starts are also being halted, he said, although the firm intends to
complete developments that are currently under way. During ProLogis’ third
quarter call, it anticipated between $2.7
billion and $2.9 billion in starts for 2008.
That guidance has since been reduced to
$2.2 billion to $2.3 billion.
Over the near term, the REIT will also
be reducing its overhead by 20% to 25%,
mainly through staffing cuts, resulting in
an estimated $100 million of annual savings, said the CEO. He noted that the
firm intends to de-lever its balance sheet
by $2 billion through next year.
“We will minimize the risk in the business model, with less land, fewer unleased developments and a more stabilized property base,” he said. “Nothing is
off the table relative to 2009. We will
review all alternatives.”
