In early May, Simon Property Group (NYSE: SPG), the largest regional mall REIT in the country with 246 million square feet of space and a market capitalization of more than $13.7 billion, announced its second round of stock and unsecured debt offerings since the beginning of the year. The offerings included 20 million common shares priced at $50 per share, with an additional 3 million shares set aside for an overallotment option, and $600 million in senior unsecured notes. The REIT already raised $1.2 billion through concurrent stock and debt offerings in late March. With the lowest debt to total market cap ratio in the regional mall sector, at 59.10 percent, only $6.9 billion in debt coming due over the next three years and $3 billion available on its credit line, Simon did not appear under pressure to raise cash to deal with debt maturities. So why would the company decide to dilute shareholder value by issuing shares twice within the space of three months?

One answer is that with REIT stocks up considerably from lows reached earlier in the year, it is the best climate for REITs to raise cash in a while. Moreover, Simon may be gearing up to take advantage of discounted properties coming on the market over the next few years, according to Rich Moore, an analyst with RBC Capital Markets. By the time the current offerings are completed, Simon should have $2.9 billion of cash on hand, in addition to its $3 billion credit line. That will give the firm plenty of potential buying power in coming years. For example, there is already $16.8 billion worth of distressed retail assets the REIT could attempt to pluck, according to estimates from Real Capital Analytics (RCA), a New York City-based research firm. That number is likely to rise as firms face continued difficulties refinancing expiring debt. In RCA's definition, distressed assets include properties that have defaulted on loans, been foreclosed upon or transferred into the hands of special servicers or receivers. Aside from distressed assets, other owners are looking to sell non-core properties from portfolios in efforts to cut costs and raise cash.

Simon executives hinted acquisitions might be in its game plan during the company's first quarter earnings call on May 1. When asked about the possibility of bankrupt regional mall giant General Growth Properties (NYSE: GGP) putting assets up for sale, Simon CEO David Simon responded: "I think they will be out there; we just have to be somewhat patient."

Simon is not the only REIT to complete a stock offering this spring. In April, REITs conducted 17 secondary equity offerings, raising $6.4 billion, and three unsecured debt offerings, totaling $685 million, according to NAREIT. This represented the most robust run of equity transactions since the beginning of the credit crunch in August 2007. By contrast, in April 2008, REITs oversaw only four equity offerings and one unsecured debt offering that together raised a total of $856 million. In NAREIT's estimates, by 2013, publicly-traded REITs might raise $728 billion in new capital through selling debt and stock.

NAREIT estimates retail REITS administered 10 secondary equity offerings between March 6 and May 14, totaling approximately $3.75 billion. Simon, Kimco Realty Corp. (NYSE: KIM), Regency Centers Corp. (NYSE: REG), Inland Real Estate Corp. (NYSE: IRC), Acadia Realty Trust (NYSE: AKR), Weingarten Realty Investors (NYSE: WRI), Equity One, Inc. (NYSE: EQY) and Kite Realty Group (NYSE: KRG) all participated, with several additional REITs indicating they might conduct stock offerings in the near future. However, unlike Simon, which appears to be on the offensive, some REITs have not been conducting offerings out of positions of strength. Rather, in a number of cases, firms needed to issue shares to raise cash that will help the companies meet approaching debt obligations.

In fact, the sell-off activity might signal the beginning of upcoming consolidation in the retail REIT sector, with strong, well-capitalized firms swallowing smaller, debt-ridden players, according to Jon Southard, principal and director of forecasting with Torto Wheaton Research, a Boston-based real estate research firm. "It's very clear that the REIT market is trying to separate winners and losers at this point and consolidation is an extension of this," says Southard. "The strong balance sheets are going to be taking out weaker balance sheets. There will certainly be the start of it this year."

Why REITs are raising cash now

Part of the reason so many REITs have taken the jump recently is opportune timing—quarter-to-date, total returns for all retail REITs rose 43.30 percent, according to NAREIT (for May, returns registered a slight drop, at 0.15 percent). Returns for shopping center REITs were up 36.65 percent quarter-to-date and for regional mall REITs 63.61 percent. Since market observers aren't sure the rally is going to last—"The extreme volatility of before seems unwarranted, but it doesn't mean that volatility will end," says Southard—REIT executives might feel compelled to take advantage of the run-up in prices as soon as possible.

But offerings also intensified in the weeks after General Growth Properties, the second largest mall REIT in the country with 182 million square feet of space, filed for Chapter 11 bankruptcy protection on Apr. 16. The firm drowned in more than $27 billion of debt it took on to fund property acquisitions at the peak of the real estate market. Unable to secure refinancing, by the time General Growth filed for bankruptcy, it had a debt to total market cap ratio of 98.52 percent. The news made clear to everyone in the industry that building cash reserves should be priority number one, says Gerard V. Mason, executive managing director in the New York City office of Savills, a global real estate services provider.

"Nobody thought they would declare and now the lenders are challenging General Growth" on properties that were included in the bankruptcy filing in spite of not having maturing mortgages, Mason notes. With that cautionary tale in view, REITs might be more willing to risk dilution for the sake of a healthy balance sheet.

So far, investors seem to be rewarding such reasoning. From March 31 through May 11, stock prices for REITs that have undergone common equity offerings have gone up by a median of 38.89 percent, according to SNL Financial LC, a Charlottesville, Va.-based research firm. By contrast, stock prices for REITs that have not done stock offerings rose 24.86 percent. On June 3, Simon opened the trading day with a stock price of $54.02 per share, 122 percent above its 52-week low of $24.27 per share. Kimco Realty Corp., a shopping center player that completed a stock offering in April, opened the day at $12.09 per share, 90 percent above its 52-week low of $6.33 per share.

"Investors are willing to provide capital to REITs today because they understand how the story is playing out," says Michael Grupe, executive vice president of research and investor outreach with NAREIT. "Much of the bad news has already been priced into the stocks earlier in the year and I think they saw good value there. They are looking beyond the current downturn toward significant growth opportunities over the next couple of years and they think [these] companies are doing the right thing."

Some of these opportunities should come in the form of individual property acquisitions, as firms with weaker balance sheets and a backlog of maturing mortgages start disposing of assets to amass extra cash. General Growth Properties is bound to bring at least some of its malls to the market, says Grupe. And in discussing first quarter earnings results, a number of other retail REITs, including Glimcher Realty Trust (NYSE: GRT), CBL & Associates Properties (NYSE: CBL), PREIT (NYSE: PEI), Weingarten Realty Investors and the Macerich Co. (NYSE: MAC), indicated they were looking to dispose of assets to increase liquidity. Macerich, for example, has approximately $125 million in non-core properties currently under contract or under letter of intent and is prepared to sell more to completely free up its credit line. In recent months, for example, Macerich has sold off outparcels at some of its regional malls. Just last week, it completed the sale of four ground-leased single-tenant properties at its Paradise Valley Mall in Phoenix for $4.6 million. Another four parcels at the same mall are in escrow. According to Macerich executives, the REIT's non-core assets are being sold at cap rates in the 8.5 percent to 8.8 percent range, at least 120 basis points above the 7.3 percent average cap rate for retail properties reported in the first quarter of the year by RCA.

But these are tough times. Talking about the possibility of further sales, including sales of regional malls, during the company's first quarter earnings call on May 5, Macerich CEO Arthur Coppola noted, "If it gets us to our goal of de-leveraging our balance sheet and in a more efficient way than waiting, we will definitely take market reality, market pricing and efficiency and expediency over waiting."

More importantly, industry insiders fully expect some consolidation in the retail REIT sector, with stronger players taking over weaker competitors. The trend appears to have started already, with North Miami Beach, Fla.-based Equity One, Inc. (NYSE: EQY) making clear overtures to Ramco-Gershenson Properties Trust (NYSE: RPT), a Farmington Hills, Mich.-based firm with a 20-million-square-foot shopping center portfolio (and an 82.8 percent debt to total market cap vs. Equity One's 56.6 percent). For the time being, however, Equity One has succeeded in securing places for two of its nominees, David J. Nettina and Matthew L. Ostrower, on Ramco-Gershenson's board of directors in exchange for voting in favor of the seven remaining nominees proposed by Ramco-Gershenson. The firm currently owns 9.6 percent of Ramco's stock.

Michael Magerman, vice president for the REIT sector with Realpoint LLC, a Horsham, Pa.-based credit rating agency, pinpoints Simon and two shopping center REITs, Kimco and Federal Realty Investment Trust (NYSE: FRT), as other likely acquirers of rival firms. Altogether, the retail sector might see four or five REITs taken out over the next two to three years, notes Mason. Leverage levels and market caps will likely be among the factors setting apart the predators from the prey.

Taking care of business

All those transactions, however, are still some way off as the REIT's immediate focus will be on cleaning up and renegotiating existing lines of credit and paying down property level debt, notes Mason. The lines of credit are "their lifeline, their everyday operating capital," he says. And both lenders and analysts remain anxious about over-taxed credit lines.

For example, Glimcher Realty Trust, a Columbus, Ohio-based regional mall REIT with a 21.7-million-square-foot portfolio, ended first quarter with $392 million outstanding on its $470 million credit facility. The facility expires at the end of this year, with an extension option until December 2010, but Glimcher is in danger of default if it doesn't meet certain performance covenants, related in part to the company's overall leverage level and the amount of recourse debt on its books. (Glimcher has so far refused to discuss the covenants in detail). Glimcher executives are currently in negotiations with lenders to extend the facility past 2010, but even if they succeed, the credit capacity on the line will likely be reduced to less than $200 million, according to Rich Moore. As a result of such concerns, Standard & Poor's rating agency recently downgraded Glimcher's corporate credit rating to a B+ from BB-.

Selling stock might be one way for Glimcher to tackle the problem, though during the company's earnings call on Apr. 23, chairman and CEO Michael Glimcher noted that the REIT's current share price ($2.89 as of June 3) precludes that option for the time-being. Instead, Glimcher hopes to generate $35 million in additional cash this year by reducing its common stock dividend to $0.10 per share. A number of other REITs, including Regency Centers, Inland Real Estate Corp. and Weingarten Realty, have also reduced or suspended their dividend payments for 2009. Several firms, including Simon and Developers Diversified Realty (NYSE: DDR), a Beachwood, Ohio-based shopping center REIT with a 155-million-square-foot portfolio, are paying dividends through a combination of stock and cash.

In addition, Glimcher (and other firms that are battling leverage levels above 60 percent) has been looking at the possibility of asset sales and joint venture transactions on existing properties. There is some interest in the market for those kinds of deals, according to Michael Glimcher, but there appears to still be a 100 basis point to 200 basis point gap between buyers' and sellers' expectations, which means a surge in actual transaction activity is some months away. What's more, Glimcher expects that the company would have to give up control of some of its best properties to achieve its capital needs. "It's more likely that we'd look at doing something with a higher quality asset based on where the environment is today," Glimcher said.

One firm that seems to have come up with a revenue-generating strategy outside of asset sales and joint ventures is CBL & Associates Properties, Inc., a Chattanooga, Tenn.-based firm with an 83.6-million-square-foot regional mall portfolio. On May 11, the REIT announced plans to expand its third party management business. As of December 2008, CBL managed 2.2 million square feet of non-CBL owned space.

CBL executives declined to discuss revenue projections for the expanded business.

The company has already reduced its quarterly dividend payments and has opted to pay the dividend through a combination of 60 percent stock and 40 percent cash. It's currently considering common stock offerings, joint venture transactions and asset sales as other cash-generating measures. CBL has a debt to total market cap ratio of 81.69 percent and a total long-term debt load of $6.6 billion.

Weeding out weaker REIT players

On the other side of the fence are companies with fortified balance sheets—Simon, Kimco, Federal, Taubman Centers (NYSE: TCO), Regency, Acadia—that are waiting for asset prices to drop low enough for acquisitions to turn into virtual steals. In fact, first quarter earnings calls separated the retail REIT sector into three distinct groups, including firms whose forward-looking statements centered on the word "opportunity;" those that talked about the possibility of asset sales and joint venture transactions as a way to provide an extra level of comfort in respect to their leverage levels and those that were focused on curing liquidity concerns by any means available.

If credit conditions won't loosen up considerably before the end of 2009, the latter will likely become acquisition targets for their larger rivals. The industry might not see another General Growth-like bankruptcy, but there might be REITs that will be dismantled piece by piece as they try to sell assets to pay down debts, says Grupe. Others might be swallowed whole. Speaking at New York University's 14th annual REIT symposium in early April, Samuel Zell, chairman of Equity Group Investments, LLC, noted that some REITs might no longer find it beneficial to remain in the public markets. But few private sector investors seem eager to take on the risk of buying out a REIT right now, says Mason. So most mergers and acquisitions activity would likely take place between the publicly traded REITs themselves.

"Whoever can amass the most capital for [mergers], they are the ones who'll get bigger and survive," Mason notes. "My guess is we'll end up with a handful of bigger, stronger retail REITs."

The process might begin in late 2009, according to Grupe, but it will be another two to three years before the repositioning is completed. First, there would have to be some movement in the credit markets and a closing of the bid/ask gap that currently remains considerable.

"I think the ingredients that are required for [consolidation] to take place are not yet in place," Grupe says.