Mr. Fick: We think that the sector is entering a new era that will be characterized by lower leverage, more stability, spread investing, less value creation and more core "REITs-as-a-mutual-fund-of-real-estate'" strategies. We feel pretty good about where the sector is sitting right now because the cost of capital today is about half of what it was a year ago for public REITs.
If we look at 2009 as a setup for 2010, at the beginning of 2009, REITs were seen by investors as the victims of a crisis and that many would not survive. Virtually all survived, including the only REIT that went into bankruptcy, General Growth Properties, and with some serious equity still remaining, even in GGP's situation. We went from being a victim of the crisis to being the beneficiary of the crisis in the eyes of many investors. What that has done has driven the average implied cap rate down into the 7%s. And for the better REITs like Simon Property Group - the guys with the best balance sheets - we're seeing implied cap rates in the mid-6s. If they can put money out, if they can invest at an 8 cap, or 7.5, maybe even a 7, it's accretive to existing shareholders. That's created optimism on the part of both dedicated and non-dedicated investors that there will be some external growth. I think that investors are now looking at that as a reason to pay up for the stocks. We think the average REIT is now trading at 120%, maybe even as high as 125%, premium to underlying asset value mostly because of that expectation of external growth.
The other thing I would say related to that is none of us sell-side analysts have any significant acquisitions in our models at this point. We are already seeing some upside to estimates, and that is likely to continue. For example, Simon Property Group purchased for $2.3 billion Prime Retail last month. No one had that in their model because you didn't know who was going to win, and that created $0.20 of earnings upside for 2010 already for Simon, and they're just getting started. I'm sure you saw that they issued $2.25 billion of bonds. Some of those bonds were dated as long as 30 years - very attractive capital.
Capital access is what has brought REITs to where they are right now. Not only were REITs able to issue $18.5 billion of equity last year, they were able to do $11 billion of bond deals, and that's before the most recent deals that we have seen so far this year. And they were able to place a significant amount of mortgages.
We published a piece on November 26 of 2008 called "Reasonable Credit for Reasonable Borrowers on Reasonable Terms," and this was when the markets were just completely closed after REITs had crashed in the second week of November. And the message at the time was: This is not permanent, this is a crisis, and it's a crisis of confidence that will pass, and at some point liquidity will have to come back to the market - not to 2006 or 2007 levels, but it would come back.
The REITs were positioned - because of having better real estate on average, although stressed and over-levered, but still better than the private markets, better management - and had the ability to show the market that if they needed to, they could raise equity, which they ultimately did. You put those factors together, they would be the first to be able to access all forms of capital. And we saw that start on March 20 of last year with Simon's debt and common stock offerings. It was the most expensive debt ever issued by a public investment-grade-rated REIT. It was also the most expensive equity that I have seen done for such a high-quality, large-cap REIT, but it started the ball rolling and it was measured.
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