Knott: Re-equitization a Multiyear Process

By Allen Kenney
The first six months of 2009 were eventful ones for the commercial real estate industry. REITs issued $16 billion in equity, and the market began to show signs of rebounding. Analyst Michael Knott of Green Street Advisors recently spoke with about the outlook for the second half of the year. Generally, how do you see the second half of 2009 shaping up for REITs?
Michael Knott: Fundamentally, I think we'll see an acceleration of the poor macroeconomic backdrop filtering its way into REITs' performance. To date we haven't really seen diminishing results. However, the bad news is that we're still going to be feeling the effects of this recession a few years out. We've seen a flurry of IPO activity recently. What do you think is behind this, and do you expect it to continue in the near term?
MK: There have been several mortgage REITs that have filed for IPOs, but I don't believe we've seen much on the equity REIT side. By and large the sponsorship seems fairly good. My guess is those mortgage REITs are turning to the public markets because private equity capital for real estate is going to be hard to come by and expensive. You're going to see a replay of the early 1990s when the public market was the best and most efficient way to gain capital. And what about secondary equity offerings? Do you think we'll see more of these equity raises as companies gird up to take advantage of distressed opportunities?
MK: In general, REITs have had pretty solid access to new capital via secondary offerings. You're going to see much more of that. We think that is a multiyear process that will play out as companies try to shift to lower levels of leverage.
Eventually companies are going to have to replace a large amount of debt with new capital. The REIT format's strong points will come to the forefront over the next few years as the public markets become one of the few ways to tap significant equity for real estate investment.
I think the public companies, in general, will be able to capitalize on distress, and the better capitalized REITs will be able to take advantage. What kind of impact do you see TALF having on the REIT market in the second half of the year?
MK: I see it having some positive impact, but it's a nebulous, evolving area of the refinance market. The ultimate magnitude of this program is still open for debate.