NEW YORK CITY-Fitch Ratings recently released its annual REIT scorecard in which it – not surprisingly – expressed concern that those companies that are dependent on accessing cheap debt financing may be in trouble. Also of concern are retail REITs that will be affected by a consumer pullback in spending, and those with big development pipelines with minimal pre-leasing.

That all said, Fitch went on to note that REITs with enough liquidity on hand are the best positioned for the year. Not only can they address short-term debt maturities with little difficulty, they are also well poised to pursue new opportunities. spoke with a handful of REITs preparing to do just that, to see where the industry thinks the new hot spots are.

Some believe if the fundamentals are right, last year’s hot prospects are still viable. For instance, retail REITs should not be counted out, says Don Wood, president and CEO of Federal Realty Investment Trust. “It is tempting to use a wide brush to paint everyone in a particular sector as XYZ, but there is a real difference for some REITs, depending on their position and need for debt.” Federal Realty, he notes, is only 25% levered with a $300 million, largely-untapped credit line. Wood says he sees investment opportunities in close-in suburbs to primary markets like Washington, DC. “Valuations have not changed that much in great locations, but they have retreated in far-out suburbs.”

Gordon F. DuGan, president and CEO of W. P. Carey & Co. LLC, which manages the REIT CPA series and owns a $9.7 billion portfolio of 850 commercial and industrial properties, says its business model has better investment opportunities in down cycles: it buys properties through a sale-leaseback, with the owner remaining in a long term lease. The business case is indeed well-suited for the current environment, which includes the growing probability of recession. Companies look to sell real estate holdings — especially if they are not core to their operations– to free up capital for expansion, if not survival. They then lease the space they used to own.

In January W. P. Carey & Co began raising capital for its 16th fund, with the goal of attracting up to $2 billion of equity over the next two to three years. Leveraged, that would be an investment pool of $4 billion to $5 billion – assuming it can be so leveraged in the current debt environment. “We have still been able to get debt because of our track record, but it is clear that the financing market has become much more difficult,” DuGan says. The firm expects to start investing through this fund this quarter.

Even though REITs traditionally maintain low levels of leverage – they are still leveraged to a certain degree, Weingarten Realty’s vice chairman Martin Debrovner points out. “Most REITs look at their cost of capital as a blend between what debt will cost versus the cost of equity, which is what the shareholder expects to receive on a long term basis,” Debrovner says. His conclusion? Even though there are more opportunities available and REITs are relatively well-capitalized, few are strong enough to maintain an acquisition-only strategy. Indeed, as valuations remain unsteady and the duration of the debt market seizure is unclear, Debrovner expects to see more REITs invest in development through JVs this year.

This has been the path, for the most part, for the past several years, thanks to continued cap rate compression. It has been more accretive to shareholders for a REIT to develop, Debrovner explains, as returns are always more than the cost of capital. “If there will be an active REIT acquisition market this year, it will be in the second half,” he says.

Timber REITs are another sector-specific play that appears poised to do well in this cycle, says Jerry Miccolis with Brinton Eaton Wealth Advisors, which recently began investing in Plum Creek Timber Co., the first timber company to become a REIT. Timber REITs, which make a very small portion of the REIT universe and are relatively new to the market, are unlike traditional REITs because their income is all long-term capital gains. Miccolis says 5% of the firm’s assets under management are invested in timber REITs now; last year none were. The firm began looking at these REITs not to diversify its real estate holdings but as a way to diversify its exposure to commodities. “The modeling work we did last year convinced us to move into timber as a separate commodity class – and REITs are a good way to do that.”

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