Pummeled by the recession, REITs rebound

By Jonathan O'Connell
Monday, January 24, 2011; 4

When local real estate values were running hot in the go-go days of a few years ago, some of Washington's biggest real estate investment trusts were sitting on their hands.

It may have seemed foolish at the time, particularly to the private developers who were using cheap debt to rapidly buy new properties. But now those days of inactivity are paying off. Local REITs, after seeing their stock prices pummeled in the recession, are re-capitalizing and pouring hundreds of millions of dollars into real estate here and nationwide.

In some cases the pace is as hot as it was before the recession arrived. First Potomac Realty Trust, a Bethesda-based company focused on office and industrial buildings in the Washington area, didn't buy a single property in 2008 or the first half of 2009, a period in which chief executive Douglas J. Donatelli said "pricing was just getting crazy." Its stock collapsed, from more than $31 in the first quarter of 2007 a low of less than $7.

But as other property holders were showing signs of distress, First Potomac beefed up its acquisitions team and returned to action in a big way, investing $580 million in 2010 in an effort to double its holdings in a three-to-five year span. In the second half 0f 2010, First Potomac put more money into the market than in any two consecutive quarters in the company's history, and it closed on another two buys totaling $38 million by Jan. 10. Donatelli said expected employment and rent increases support the deals. "We still think we're in the very early stages of recovery," Donatelli said. "We haven't even seen any of the rental rate growth that we expect in the next three or four years."

First Potomac isn't alone. Washington Real Estate Investment Trust, based in Rockville, raised $250 million in 2010. George F. "Skip" McKenzie, president and chief executive, said REITs have "a whole bunch of arrows in the quiver" when it comes to raising capital. It bought an $88 million shopping center in Columbia in December and this month announced two D.C. purchases totaling $127 million. "The capital markets have opened back up for us and there's a number of ways we could raise capital that have become available," McKenzie said.

A REIT is a real estate company that primarily manages income-producing properties and distributes most of its profit as dividends. Its ability to raise money quickly and cheaply is in contrast to private developers, who are now being handcuffed by new lending standards and an overall lack of financing options. The fundraising capacity "is a really key advantage that most REITs have over other investors right now," said Victor MacFarlane, managing principal and chief executive of MacFarlane Partners.

"Their balance sheets are great, their costs of capital are well below what anyone else's are," he said.

First Potomac is so eager to spend that in December it did something it had never done before and may never do again -- provide a loan to another property owner, Douglas Development, on its building at 950 F St. NW in the District. Donatelli said it was too early to say whether the company would do more lending. "For the time being, it's kind of an interesting play and in the right circumstances it's something that we're interested in looking at," he said.

Donald Wood, president and chief executive of Federal Realty Investment Trust, also based in Rockville, said he expects to continue to see deals throughout this year and next in part because of the debt coming due for those who borrowed in the peak years. "There's a lot of companies that were really kind of screwed up because they had too much debt outstanding, and they had to figure out how to refinance that, and they had tenants closing and it was a mess," he said. "And we didn't have that."

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