REITWise
Capital Matter: Seeking liquidity in REITland
by Jennifer D. Duell
T
he fundamental differ-
ence between REI Ts
and other corporations
is that REITs must pass
the lion’s share of their
taxable income through
to shareholders in the form of
dividends. That means REITs can
retain limited earnings and makes
them more subject to the whims
of capital markets for the funding
they need to grow, manage and
finance their business.
Today’s frozen debt markets
make it difficult and expensive for
many REITs to obtain financing.
The depressed stock market,
Glow ImaGes/PhotolIbrary
until recently, has made it equally
challenging for many REITs to
raise equity.
However, REITs are implementing a variety of strategies to
strengthen their cash positions so
they can satisfy their upcoming
debt maturities and continue to
operate. “These times are unprecedented, and you have to use as
many arrows in the quiver as you
can,” says Michael Pappagallo,
executive vice president and CFO
of Kimco Realty Corporation
(NYSE: KIM).
CMBS Void
Among the biggest issues REITs
are dealing with today is the
void left by the CMBS market.
CMBS hasn’t been available for
more than a year now, according
to Dennis Schuh, managing director of J.P. Morgan.
Although most REI Ts used
a combination of both CMBS
and portfolio loans from banks
and insurers, the CMBS void
has been significant. Portfolio
lenders such as pension funds
and life insurance companies
don’t have enough money to
lend to make up for the CMBS
shortfall. This creates a competitive situation among borrowers
and drives up interest rates.
However, with few alternatives,
REITs seeking mortgage financing have been looking to primarily portfolio lenders, Schuh says.
In fact, mortgage financing
may well be the best option for
REITs today to generate liquidity, according to Bruce Johnson,
CFO and managing director of
Regency Centers Corporation
(NYSE: REG). “REI Ts that
have a large pool of unencumbered assets can place secured
debt on these properties, albeit
at conservative loan-to-value
ratios,” he says.
Unsecured Debt
The availability and cost of unsecured debt has changed significantly over the past 12 months.
Today, the market for corporate bonds is cost prohibitive for
many REITs, says Teresa Hee,
managing director of real estate
debt capital markets for
Wacho-via Securities. REIT spreads
for corporate bonds are wide: on
average, the spreads for a 10-year
secondary bond range from 900
to 1,000 basis points for a REIT
with a BBB credit rating. “The
bond market isn’t closed, it’s just
very expensive,” Hee says.
However, that hasn’t stopped
some REITs from tapping the
unsecured debt markets. Simon
Property Group (NYSE: SPG)
and Ventas Inc. (NYSE: VTR)
each offered hundreds of millions of dollars worth of corporate
bonds in early 2009.
Hee speculates that the recent corporate bond offerings
show investors are warming to
REITs’ prospect for surviving the
