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REITs Jump on Reviving Stock Markets To Raise Capital and Pay Down Debt



May 29, 2009 – Comments (4) | RELATED TICKERS: SRS

Liquidity, Liquidity, Liquidity REITs Jump on Reviving Stock Markets To Raise Capital and Pay Down Debt

CoStar # 1 Commercial Real Estate Information Company 

By Mark Heschmeyer May 27, 2009

With bank lending a challenge, publicly held property REITs and real estate operating companies (REOCs) have started turning to their investors for a bailout - and are getting it. 

At least 29 property REITs and REOCs have gone to market with secondary stock offerings in the last two months and have raised or are raising more than $8 billion in new financing - no lender strings attached. 

The money raised is being primarily used to build up liquidity by reducing the outstanding balances on secured and unsecured lines of credit and repaying loans upon their maturity dates. However, some of the new money is being set aside for future acquisitions, developments, redevelopments and capital improvements, as well. 

Going into 2009, most REITs cited liquidity as their highest priority because of uncertainty in the credit markets and bank lines expiring this year and next. 

The latest round of secondary stock offerings is supplementing other efforts the companies have undertaken to enhance liquidity. The other efforts include raising more secured financings, dividend modifications (in the form of cuts, partial stock dividends, and/or suspensions), and asset sales. However, securities ratings agencies have pointed out limitations to those efforts. 

Many REITs have repurchased unsecured bonds in the open market at discounts to par. While this may be an opportunistic investment opportunity to reduce leverage, such transactions, if large enough, can weaken liquidity if longer dated bonds are repurchased, according to Fitch Ratings. 

Fitch also noted that many REITs have paid common dividends through a combination of cash and the issuance of new common shares to preserve liquidity, but a dichotomy has emerged with many REITs are preserving capital by choice - but others out of necessity. 

Moody's Investors Service noted that the asset sales are difficult to complete due to lack of debt capital and investor fear that prices will continue to decline. In addition, Moody's said it expects to see a rise in commercial mortgage default rates, which may distract lenders from originating debt in order to focus on the performance of their existing loan portfolios. 

On the other hand, the bear market rally that started in late November 2008 seems to have ended in the first quarter of 2009 as concerns regarding the health of the financial sector lessened, according to Duff & Phelps. The stock market rally, which began in March, extended into the second quarter and REITs, for the most part, have outperformed in the revived markets. 

"In our opinion, the declines in real estate security share prices over the last 12 months have gone a long way toward discounting the challenges the industry faces relative to declining asset values and the higher cost and lower availability of capital," Duff & Phelps wrote in its first quarter REIT review. "Thus, now may be a good time to revisit and rebalance your targeted allocation to real estate securities." 

Duff & Phelps said it expects to see more REIT management teams embracing the deleveraging process by issuing shares, saying "it is wise to issue equity after a rally has been underway and when such uncertainty remains as to the availability of credit and the depth and duration of the recession." 

In fact, three REITs announced new secondary offerings as this story was being written. 

Although certainly positive signs, for now analysts say the supply of equity still dwarfs the need. Citigroup, in a survey of available equity in the marketplace, estimates that REITs would need $35 billion in total equity to bring sector's leverage down to 50% at a presumed 8% cap rate. To reduce leverage to 45% would require $57 billion in equity. 

"We think the wave of companies looking to raise additional capital is large, however, the likelihood is that the offerings will be coming from the stronger, better-capitalized companies," said Citi. "Most of the companies with low equity values appear reluctant to issue equity at this price, despite the need, as their market caps have sunken below the amounts needed." 

The following is a summary of the recent stock offerings from major public REITs and REOCs in the last two months. (See full article here. You made to join to read but it's free and requires no credit card)

(Personally I am leaning bearish on real estate, commercial real estate and REITs in particular  but it's hard to argue with these actual deals happening now. I thought this article might be of interest to those who follow this sector but who may not be familiar with this source/service. Naturally I think their spin would be industry favorable but I have read articles containing surprising candor and pessimism. Commercial just isn't quite as hopelessly pollyanna as residential.But I bought SRS today anyway. I believe Commercial RE is a lagging market and the fallout is not yet over and may be severe-Alex)

4 Comments – Post Your Own

#1) On May 29, 2009 at 10:05 PM, TMFBabo (100.00) wrote:

Thanks for the good read! I'm glad to see an REIT post.  The entire REIT sector seems to have been pummeled, and most of it for good reason.  However, I don't think the entire sector deserves the beating, as REITs are not equally exposed to the coming long-term debt to be due and commercial real estate defaults.

I've jumped in and bought EPR's series E convertible preferred stock, and am still hunting for any other preferred issues I might like.  I figured there'd be massive dilution of common shares, so I decided on the preferred stock route for my REIT exposure.

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#2) On May 29, 2009 at 11:17 PM, dibble905 (< 20) wrote:

Good read Alex.

Perhaps you read my recommendation on DDR?

P.S. I haven't forgotten about your request in my previous blog's comment -- I'll try and put together a breakdown of how I dig through the ashes for morel.

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#3) On May 30, 2009 at 5:40 PM, Alex1963 (27.71) wrote:


I hope you do well with your investments. I'm likely missing out on some good plays but I just don't like the whole sector right now. Maybe I should reconsider this. There must be some well capitalized strong yet beaten down performers out there. I missed out on some good financial (bank) plays over a similar bias.

Best of luck & thank you for your comments


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#4) On May 30, 2009 at 5:57 PM, Alex1963 (27.71) wrote:


I did read it and the comments others posted as well. I have to admit I just read Robert Prechters Conquor The Crash and he wrote ' Make sure you avoid REITs which are perhaps the worst property related investments during a bear market. Some of them valued at $100/share in the early 70s fell to 1/4 by late '74 and most of them never recovered. REITS are sold to the public because the people who do the deals don't want to be stuck with them... "

This book was excellent and has some pretty amazing predictions for today considering it was written in '02. Furthermore, like TSIF I fear the payout restrictions will cripple the bulk of these vehicles unless something changes in how they can be structured. I believe commercial lags the residential market and that they are not even 1/2 way into their downslide. I've been in RE for 20+ years both residential & development/commercial and I am not too optimistic for the industry/sector as an investment at this point. In fact I just bought  SRS yesterday. But lots of smart folks are finding gems so I probably need to re-think this blanket bias :)

Love to have you respond. Favorite players are an invaluable find IMO and your POV would be much appreciated.

Thank you for your comments


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