August 25, 2009 / 9:32 PM / 8 years ago

US CREDIT-REIT bond rally could reverse on refinancing needs

5 Min Read

 By Karen Brettell
 NEW YORK, Aug 25 (Reuters) - Bonds of U.S. real estate investment trusts have rallied as thawing credit markets eased concerns over the sector's liquidity and short-term refinancing needs, though the continuing need to refinance maturing debt may spark renewed weakness.
 REIT bonds have rallied as the companies shored up liquidity with equity and debt sales, and extended maturities on revolving credit lines.
 Spreads on REIT bonds have narrowed to 392 basis points, from more than 500 basis points in July, according to Bank of America Merrill Lynch data. The spreads had widened to over 1000 basis points in April.
 "REIT credit spreads have continued to tighten as near and intermediate refinancing risk has subsided largely due to much improved access to capital in the form of a thawing unsecured market, higher equity values, and the potential for CMBS issuance via TALF," CreditSights analysts Craig Guttenplan and Rob Haines said in a report on Tuesday.
 REITs are expected to benefit from the government's Term Asset-Backed Securities Loan Facility (TALF), which aims to jump-start the moribund commercial mortgage-backed securities (CMBS) market.
 Mall and shopping center owner Developers Diversified Realty Corp said last month it expects to complete its first TALF deal in the fall, making it potentially the first borrower under the program. For details, see [ID:nN24472731]
 The CreditSights analysts said that they believe the majority of REITs that they cover have sufficient cash and credit capacity to meet their unsecured debt through 2012.
 "Within our coverage universe, most companies have already reduced their reliance on credit facility borrowings to less than 25 percent usage of the gross capacity as part of the deleveraging process," they said.
 However, "while the industry's liquidity situation is less tenuous than it was at the beginning of the year, plenty of headwinds remain," CreditSights said. "Most noteworthy of which is deteriorating underlying commercial real estate fundamentals which increases property level refinancing risk."
 Simon Property Group (SPG.N) and Kimco Realty Corp (KIM.N) are among CreditSights top debt recommendations in the sector.
 Standard & Poor's and Fitch Ratings, however, remain concerned about the ability of REITs to refinance coming debt maturities, and have warned about continuing downgrades in the sector.
 "Although we acknowledge that recent robust equity issuance and dividend cuts support these companies' deleveraging efforts, we view this activity essentially as a downpayment on the additional capital they will need to comfortably meet their debt maturities and capital investment requirements over the next few years," S&P said in a statement last month.
 S&P has downgraded roughly one-quarter of the 58 publicly rated REITs since the beginning of the year, and 40 percent of these companies currently have negative outlooks, the rating agency said.
 "Collectively, these rating actions affected companies across most property subsectors and largely reflected our concerns about high leverage and constrained liquidity," S&P said. "We believe these two issues, more than anticipated deterioration in operating portfolio performance, are likely to drive the bulk of negative rating activity going forward."
 Fitch Ratings also this month warned that appetite for REIT shares may wane, in spite of the success of recent sales.
 "Although there has been broad market acceptance for U.S. equity REIT common equity issuances during 2009, the equity market's willingness to continue to participate in the deleveraging process for REITs is uncertain," Fitch said in a statement.
 "Continued liquidity concerns and deteriorating property fundamentals, together with a recessionary U.S. economy and constrained real estate debt capital markets will continue to pose challenges to U.S. equity REITs throughout the remainder of 2009," Fitch said.                 

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