TUCSON -- When Developers Diversified Realty (DDR) announced it was shopping its 46% stake in American Industrial Properties (IND) , all eyes turned to PSBusiness Parks (PSB) - Get PS Business Parks, Inc. Report.
Why? PSBusiness Parks is sitting on nearly $75 million in cash. The Glendale, Calif.-based REIT has a capital structure containing only 4% debt, yields only 4.5% and has a 41% payout of its funds from operations, a measure of REIT cash flow. That compares to an average REIT yield north of 8% and payout above 70%.
Then when PSBusiness Parks announced it was postponing its fourth-quarter earnings announcement until mid-March, murmurs of a pending deal got louder.
The merger talk even floated other boats, pushing up the stocks of industrial REITs including
East Group Properties
Pacific Gulf Properties
Cabot Industrial Trust
But PSBusiness Parks isn't on the prowl.
"If we are buying another REIT, someone forgot to tell me," says PSBusiness Parks CFO Jack Corrigan. "We aren't buying anyone."
In an interview at this week's
Sutro & Co. Western Real Estate Conference
, Corrigan acknowledged that the confluence of events might have seemed suspicious, but said it is nothing more than coincidence. "Deciding to wait
on the earnings report was received differently than we expected," he said. "However, we just wanted to make sure our auditors were done and the board had reviewed the results."
News of Corrigan's denial is likely to quiet the excitement for regional industrial REITs, says Sutro REIT analyst Craig Silvers. "While valuations remain attractive, removing that catalyst will dampen the enthusiasm."
So, if a deal isn't in the works, what will PSBusiness Parks do with all that cash? Wait, says Corrigan. "We are always looking at possibilities, but we are very disciplined." He says the recent increase in interest rates has pushed the company's cash yield above 6%.
While patience is a virtue, a stash of cash could hurt earnings potential, especially when good industrial properties are available with 9% to 10% returns. Corrigan acknowledges that concern but says the company won't be rushed. "We'll find deals that make sense at good prices, then we'll act."
ProLogis Puts Merger Rumors on Ice
, a Denver industrial REIT with a significant presence in the refrigerated storage business, told investors the company wouldn't make a play for the refrigeration business owned by a partnership of two REITs --
Crescent Real Estate Equities
. "It would be very difficult for us to buy the
Vornado-Crescent business. Their business is nearly $1.5 billion and ours is $800 million," says ProLogis CFO Walter Rakowich. "To buy them would likely be impossible."
Message to REITs from credit analysts: Think twice about stock buybacks. After suffering through two years of sagging stock prices, REITs are looking for anything that might push equity prices higher including aggressive stock repurchase plans.
However, in an industry starving for capital, most buybacks make little long-term sense. "Stock repurchase programs and the impact on credit quality remain wildcards," says
Standard & Poor's
credit analyst Elizabeth Campbell. "We will continue to focus on the expected size and funding sources for these buybacks in determining credit implications. However, there is no question that aggressive, debt-financed repurchase programs will result in ratings downgrades."
Yet, a handful of companies look prepared to buy back stock through increased leverage. For example,
is buying $100 million in stock and using its credit line to pay for it. The company -- with 60% of capital from debt and preferred stock -- says it will sell properties in the coming year.
Camden Property Trust
has been aggressively buying its own stock with leverage. Again, the company says it will sell assets through the year to reduce the leverage impact of the buyback. However, that's a gamble investors may want to avoid. "There will come a time when a company won't be able to sell for the price they thought they would," says one fund manager. "Then the leverage becomes permanent and the buyback looks foolish."
The bottom line: Most buybacks make little sense for REITS. "Buybacks are especially a concern for an industry that generates no free cash flow," says
Duff & Phelps
real estate analyst Scott O'Shea. "You can't shrink your way to greatness."
A Little REIT Magic
Sutro produces a quality conference year after year, providing an unhurried atmosphere and in-depth conversations with REIT managements and investors.
They also throw quite a party. This year
magician Scott Schrock provided the entertainment with magical illusions: producing doves from thin air and cramming his 5'5" assistant into a 2'x 2' box and poking swords through her every bone. Amazingly, she lived.
After a mystifying show, one REIT fund manager said: "That's exactly what this industry needs."
I was left wondering if he was referring to the magic or the illusions.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at