By Ilaina Jonas
NEW YORK (Reuters) - Many real estate investment trusts (REITs) spent the first quarter avoiding a financial funeral, but when they report second-quarter earnings in the next weeks, some may be feeling a new sense of longevity.
What a difference $14 billion makes.
While the first-quarter earnings season was wracked by fears about who would follow mall owner General Growth Properties Inc
"I think that initial widespread fears that you're going to have (more of) these types of GGP-type blow-ups have left the building," Green Street senior analyst Andy McCulloch said.
The $14 billion the REITs raised in massive equity offerings in the second quarter helped strengthen and stabilize REIT balance sheets. The unexpected demand lifted the benchmark MSCI U.S. REIT index <.RMZ> from a low of 271.8 in March to 457.04 on Friday, reflecting confidence in the sector's long-term survival.
This earnings season, investors and analysts will be gauging the damage the U.S. recession has inflicted on demand for office space, shopping centers, apartments and warehouse and distribution centers.
"Overall, the things that we're going to be most focused on are occupancy and credit of tenancy and how the companies are going about dealing with these issues," said Robert Gadsden, Alpine Realty Income & Growth Fund portfolio manager.
Some investors and analysts fear that apartment REITs -- such as AvalonBay Communities Inc
Neighborhood shopping centers, which are anchored by grocery or drug stores, were thought to be recession-proof. But after Regency Centers Corp
MALLS AND OFFICES
So far, mall giants such as Simon Property Group Inc
"I think that's the area that the market's going to be focused on for the mall group to see whether there's been any cracks that are allowing for retailers to get some rent relief from the landlords," Gadsden said.
For office companies such as SL Green Realty Corp
And looking to industrial companies, such as AMB Property Corp
Investors said they believe the overall REIT sector will reflect continuing deterioration.
"Generally, we're going to be looking for earnings to be down from last year at a weighed average negative growth rate in the 5-to-10 percent range," said Jay Leupp, senior portfolio manager for Grubb & Ellis AGA funds.
But deciphering results may be complicated by debt repurchase gains and more shares issued during the equity offerings.
"The earnings that we're going to see this quarter and for the rest of the year are going to have a lot of noise in them," Gadsden said.
Still, investors expect REITs to continue trimming their leverage levels and bolstering balance sheets.
"Equity is probably not quite as hot a topic as last quarter, but it's still important," McCulloch said. "Now everyone is moving on to phase 2 of the re-equitization process. As far as deleveraging, the REITs still have a long way to go."
REIT executives also may try to provide a peek at the more distant future, now that they are more certain they will have one.
"I do think in some sectors we will see some potential rebound in 2010," Leupp said. "There is going to be the potential in some sectors for earnings growth and for companies with healthy enough balance sheets to go on offense and make high-yielding acquisitions that actually drive earnings growth."
(Reporting by Ilaina Jonas; editing by Patrick Fitzgibbons and Matthew Lewis)
