Barron’s sat down and interviewed real-estate veteran Marty Cohen , co-CEO of Cohen and Steers, who gives a sense of optimism to the REIT market and that there maybe light at the end of this long and dark tunnel.

Similar to the consensus among most REIT analysts, Cohen agrees that the sharp downfall in REITs came at the hands of the swift contraction of the credit markets. Cohen states,

"When credit began to constrict, demand for real estate and public REITs disappeared. For a while REIT prices stabilized, but by fall, it appeared that the economy was falling off a cliff and the financial system was collapsing; the second down-wave was steep and swift. Without credit, and with great uncertainty about the future of occupancies and rents, real estate and REITs became impossible to value."

With the difficulties in valuing REITs, Cohen believes there are possibilities out there to pick up REITs at what he deems extremely low prices and the bottom is near, maybe even in 2009:

"They are trading at steep discounts to asset values, even using our reduced estimates of value, historically high dividend yields and low price-to-cash-flow multiples. The single most important factor affecting a recovery will be the course of the economy. Fortunately, in this cycle there hasn’t been a great deal of overbuilding, which would have worsened the outlook considerably, as it did in the early 1990s. We expect the record fiscal and monetary stimulation being put in place worldwide to at least stem the economy’s decline. We should start seeing evidence of this by the end of 2009, when economic statistics begin to suggest a bottom."

Cohen goes on to give his take on the new IRS rule allowing REITs to pay its dividend in stock. He argues that it is the single worst idea in the industry in a long time and believes any investor with a choice between stock or cash as a dividend would take cash.

At the end of the interview, he asked to give some of his top picks for REITs, which we have outlined for you below.

Marty Cohen’s Picks

TEXT SIZE PRINT EMAIL DIGG SINGLE PAGE REPRINTS GET RSS Subscribe Now With these readers: Or copy the rss link: Recent Company Ticker Price Simon Property Group SPG $44.44 Boston Rroperties BXP 44.26 AvalonBay Communities AVB 54.68 Macerich MAC 15.85 Developers Diversified Realty DDR 4.81 Host Hotels & Resorts HST 5.76

Affected by the stock market collapse, the credit freeze, and the housing and layoff crises, REITs  in the U.S. are being hit on all sides, but there maybe light at the end of the tunnel, maybe .

U.S REITs are subject to law that forces them to yield 90% of their net income to shareholders, therefore limiting their capital on hand. With limited cash, most REITs turn to financing in order to acquire new property, but financing has been difficult to obtain with the freeze on lending and credit from banks. Elizabeth Ody of Kiplinger states ,

"So REITs typically have to borrow to finance purchases of new property-usually, the more aggressive a REIT grows, the more money it needs to borrow. As credit markets have seized up, it’s become increasingly difficult for REITs to roll over debts as they become due."

Not only is the freeze on the credit market a large detriment, but so is the rest of the sour economy. As companies turn smaller and smaller profits, they either go out of business or restructure their obligations. REITs own a good amount of the property in which these companies occupy, and if they go out of business, they are vacating office space–a direct hit to a REIT’s revenue stream.

However, some believe that as the credit market recovers, so will REITs .

"Since mid November, credit markets have shown some signs of thawing. REITs have responded by performing better, to put it mildly: From November 20 through January 23, the REIT index gained 31%. As credit markets return to normality, REITs stand to benefit further."

2009 will be an interesting year for REITs.  Some groups within the industry will fare much better than others and the determining factor will be how the overall economy bounces back. If lending is opened and profits begin to come back, REITs will be a great investment option once again.

The credit crunch finally seems to be taking its toll on the REIT sector particularly malls, however, some groups, notably Simon Property Group, continue to expand.

General Growth, owner/manager of shopping malls across 44 states,  has seen its growth stall due to its large debt position.  Joel Bloomer of Morningstar states,

“General Growth is one of the most leveraged REITs out there,” said Bloomer. “When you combine that with what’s happening in the credit markets, it’s a perfect storm for disaster.”

Apparently, the company is looking to refinance its large loan portfolio, but is having trouble finding the financing to do so in such a tight credit market. Many analysts agree that they are in the position that they are due to paying top dollar for properties on credit and misreading retail’s future.

On the other hand, Simon Property Group is looking to expand on General Growth’s demise. Sources say they will be looking to pick up close to 200 properties at a discount.

Simon Property Group avoided the pain of the recession by not being as aggressive these past few years as General Growth and by not leveraging their balance sheet. Bottom line, in this recession, capital is king and Simon Property Group looks to be a in a position for growth with their strong cash position and little debt.

Yet again, the week began with bad news for REITs. Developers Diversified dropped 17% after announcing it was unable to complete a 13-property sale this month as expected. The deal would have brought the REIT $890 million . The struggling General Growth Properties Inc . said it was still trying to extend the maturity date on $900 million in mortgages for two Las Vegas malls. However, by mid-week, the REIT announced it was able to negotiate a second extension and stave off defaulting on the loans, a move that could have led to more defaults and bankruptcy. Meanwhile, Cedar Shopping Centers Inc. announced it was able to postpone repayment of $300 million in debt.

Despite a 13% jump on Friday, Developers Diversified closed the week down 17% compared to last Friday’s close. General Growth Properties dropped 3% on the week while Cedar Shopping Centers jumped 19% on Friday to close out the week up 22%.

REIT ETFs RWR and VNQ are up 3% and 8% respectively compared to last Friday’s close.

In other news:

• Fitch said delinquencies on commercial property mortgages dropped last month because of an increase in loan extensions. It was the first drop in delinquencies since July. Still, Fitch expects delinquencies to rise, especially with mortgages tied to retail and hotel properties.

• First also noted that liquidity for REITs was weakening and warned downgrades were coming for REITs with liquidity shortfalls if funding markets didn’t reopen.

• FBR Capital Markets upgraded its ratings on Corporate Office Properties Trust and Washington REIT to outperform.

• CBRE Realty Finance, Inc. suspended its dividend.

• Several lodging REITs cut their dividends.

• Potlatch Corp. completed the spin-off of its pulp-based businesses.

• First Industrial Realty Trust lowered its earnings forecast by $0.55 a share and announced it will be discontinuing its European operation.

• Republic Properties Corp. has filed suit against Liberty Properties Trust.

• Hong Kong politicians proposed their government buy shares in the country’s Link REIT to prevent rental increases but the motion was voted down.

• Japanese home builder, Daiwa House industry Co. stated it believes the REIT market there will take 3-5 years to recover. Last June, Daiwa House cancelled plans to raise money through a REIT IPO and recently announced plans to sell houses at a loss to generate cash.

As we approach the final two weeks of 2008, REITs are closing out an unprecedented year. Long considered a way to diversify from the volatility of stocks, REITs performed very similar to equities this year, moving in tandem with both their losses and gains. Green Street Advisors estimates that REITs are currently trading at 30% below net asset value, but reminds investors that it’s difficult to accurately assess value in the current market, given the dearth of transactions that can be used as benchmarks.

REITs closed the week strong, most notably ProLogis which had a monster Friday. The stock jumped over 42% after announcing a cash-tender offer on its 5.25% notes due November 15, 2010.  ProLogis is up 64% compared to last Friday’s close.

On the whole, Friday’s boost enabled REITs to post gains on the week. REIT ETFs RWR and VNQ are up 2% and 3% respectively compared to last Friday’s close.

The outlook going forward is far from clear.  Fitch is forecasting a tough year for REITs invested in malls and shopping centers as well as industrial and office properties, but foresees multi-family and healthcare REITs faring better.  Wachovia rates the healthcare REIT sector Overweight citing, in part, their stronger balance sheets and expected increased government spending. They single out Nationwide Health Properties and Senior Housing Properties Trust as REITs that should do well.

Not everyone agrees, though.  Greenstreet Advisors is forecasting a challenging environment for REITs specializing in healthcare properties. They argue that since a substantial percentage of this sector’s income comes from senior-living facilities, low property values might make it more difficult for seniors to sell their homes to finance a move into such a facility. Furthermore, with unemployment rising, more seniors might opt to move in with family instead of a facility to save money. Greenstreet expects this to put near-term downward pressure on Ventas, HCP, and Nationwide Health Properties.

Nationwide is up 10% over last Friday’s close, Senior Housing Properties is up 7%, Ventas is up 15%, and HCP is up 4%.

In other news:

• Cambridge Industrial Trust (Singapore) secured $262 million in financing
• American Land Lease Inc. is being acquired for $438 million.
• Investors are looking to pick up the pieces of Japan’s shattered REITs, including New City Residence Investment Corp
• MHI Hospitality Corp. cut next year’s annual dividend 70 percent
• Saul Centers announced that it will be cutting its dividend due to rising delinquencies in its retail properties.
• Fitch sees imminent defaults at General Growth Properties

Despite the uncertain future, some people are thinking it might be time to buy .

It was a bumpy week for REITs beginning with massive losses on Monday that effectively erased last week’s big gains.  Solvency concerns wiped out roughly a third of Denver-based Prologis and First Industrial Realty Trust’s value.  But REITs bounced back on Tuesday including ProLogis which jumped 26% on the news it secured over a hundred million in financing that it will use to refinance its debt and cut costs.  ProLogis and First Industrial Realty Trust both ended the week with huge gains on Friday up 35% and 21% respectively. While Friday’s surge pushed ProLogis up 27% compared to last Friday’s close, First Industrial slipped 9% on the week.  The REIT ETF, RWR, gained 11% on Friday, enough of a jump to post a 2% gain over last Friday’s close.

Still, the balance of the news this week was negative:

• ProLogis and Weingarten Realty Investors had their credit-ratings downgraded.   
• Prospect Asset Management Inc., a Honolulu-based investment fund, announced that losses incurred 
• Houston-based REIT announced that it believes its stock price is unjustifiably low and has decided to go private as a result.

Despite a tough environment in which many investors are retrenching and cutting costs, others are announcing deals including KBS, AMB Property Corp., Washington Real Estate Investment Trust, Canada’s Skyline Apartment REIT, and Malaysia’s Axis REIT.

The REIT Industry also got a boost in the Philippines where the government passed a bill that will permit REITS being listed on the Philippine Stock Exchange.

Going forward, all eyes will be looking at who will have to cut their dividends and analysts are making a few projections, including forecasting cuts at Anthracite Capital Inc. and NorthStar Realty Finance Corp.

A new article out of Australia shows that Australian REITs have been the worst performing within the REITs worldwide industry in 2008. Other performances they mention come to these ranks:

1. Australia:  -48.71 %
2. Japan: -40 %
3. United Kingdom: -40 %
4. United States: -20 %
5. South Korea: +5.71 %

An article by ETFGuide.com explains how many REITs can offer shelter in the current economic downturn.

One interesting point in the article is that many investors fail to include exposure to international REITs in their portfolio.  International real estate can be a good hedge for American real estate.

“The SPDR DJ Wilshire Real Estate ETF (AMEX: RWX – News) contains exposure to top worldwide real estate markets including Australia,France,Japan and the United Kingdom.”

To be qualified as a REIT in the US under IRS guidelines, a company must invest at least 75 percent of total assets in real estate; derive at least 75 percent of gross income as rents from real property or interest from mortgages on real property; and make annual distributions of at least 90 percent of taxable income in the form of shareholder dividends.

The falling housing market and resulting impact on the financial market continues to take its toll on Real Estate Investment Trusts. 

Today, General Growth Properties Inc. traded down as much as 50%, leading REITs lower again, according to the Bloomberg article “General Growth Leads REITs Down on Debt Concern“.

The difficulty in obtaining credit, falling real estate values and concern over the slowing U.S. economy have sparked declines in real estate investment trusts over the past year. High gas prices and job cuts by employers have left analysts concerned over retailers and mall operators and led to a 40 percent drop in the 27-member Bloomberg REIT Retail Index over the past year through yesterday. The index fell as much as 7.7 percent today.

While the REITs performance is bad, the entire S&P index lost 5.74% today, as well.  The contagion has not been limited to real estate related securities.