Putting the REIT Maturity Crunch into Perspective

As Zero Hedge's all time favorite investment bank Merrill Lynch (BAC) is all too happy to attest, the REITs have proven to be a phenomenal source of underwriting revenue. Amusingly, the REITs which face staggering near-term maturities are still unable to access the debt capital markets (with one or two notable exceptions), yet have raised well over $10 billion in equity to date (which they have used almost exclusively to pay down the cheapest form of capital: secured credit facilities: why?) leaving one to truly wonder just what is the big picture here really all about (aside from ML pocketing dilution cash).

So just how far down the road are recent equity raises going to take the (still) very troubled REIT space? (Why still? Redo the FFO calc with a 9% cap rate. Come back then). Answer- not all that far.

Below (click to enlarge), I present a summary of the most notable REIT follow on offerings done in the past 2 months: as one can see, the amount raised is staggering, and the main lead underwriter (sole or joint) by a vast margin is Merrill Lynch.



The two immediate take home messages here are that despite an average 24% dilution for REITs which have undergone the ML Cohen & Steers (CNS) treatment, they have still outperformed the general REIT universe in price appreciation (P/FFO) by a factor of almost 300% (8.4x to 9.6x for broad universe compared to 11.7x to 14.4x for the diluted names). Odd you say?

And while the chart above shows not only the ridiculous prominence of ML in the pantheon of busy little underwriters, it also demonstrates just how much capital REITs have raised to date. The reason of course is the imminent maturity schedule for the vast majority of these. The chart below (click to enlarge) shows the 2009-2011 maturity schedule for the bulk of the major REITs split by category. One can see that based on just these main 15 companies, there is almost $20 billion in upcoming debt maturities over the next 3 years, which explains why any and all REITs will take advantage of every single orchestrated market bubble from now until they ultimately follow in the shoes of GGP, to sell the pieces of paper better known as common stock.



In other words, mother Merrill will likely not stop (and the market squeeze will likely not loosen) until there is at least another $10 billion in additional dilution from the remaining usual REIT suspects (and until ML has pocketed at least another $100 million in underwriting fees). Even so, I have not disclosed the 2012-onward maturities, where things really start to get interesting. But by then, as everyone knows, we will either have hyperinflation, and all the REITs' exiting debt would be payable down with one mere $1 trillion bill, or the S&P will be at 6.66.

In either case current investors will long be gone, having sold to whatever hot potato holders are the most fervent believers in Jim Cramer's economic "fundamental analysis."

hat tip IMA5U

Comments

[REITBull:]

"Amusingly, the REITs which face staggering near-term maturities are still unable to access the debt capital markets (with one or two notable exceptions), yet have raised well over $10 billion in equity to date (which they have used almost exclusively to pay down the cheapest form of capital: secured credit facilities: why?) leaving one to truly wonder just what is the big picture here really all about (aside from ML pocketing dilution cash)."

The "big picture" here is to leave their credit facilities open. If a REIT cannot refinance an upcoming debt maturity, they will tap the credit facility to avoid a maturity default. This leaves the REIT more time and flexibility to find financing or sell assests if needed. SPG has about $3 billion of availability on on their credit facility. Many others have over $1 billion available.

May 13 08:51 AM

[dcb:]

So you pay down this line of credit so you can tap it again?
Does this mean the money being raised by Merrill (lets say) by underwriting is going back to the credit line at merrill? wouldn't that be some kind of conflict of interest? I raise equity and dilliute shareholders to pay myself back?

Please explain?


On May 13 08:51 AM REITBull wrote:

> "Amusingly, the REITs which face staggering near-term maturities
> are still unable to access the debt capital markets (with one or
> two notable exceptions), yet have raised well over $10 billion in
> equity to date (which they have used almost exclusively to pay down
> the cheapest form of capital: secured credit facilities: why?) leaving
> one to truly wonder just what is the big picture here really all
> about (aside from ML pocketing dilution cash)."
>
> The "big picture" here is to leave their credit facilities open.
> If a REIT cannot refinance an upcoming debt maturity, they will tap
> the credit facility to avoid a maturity default. This leaves the
> REIT more time and flexibility to find financing or sell assests
> if needed. SPG has about $3 billion of availability on on their credit
> facility. Many others have over $1 billion available.

May 13 09:01 AM

[REITBull:]

It's important to note that these are revolving lines of credit that are usually issued by a syndicate of banks (not just one such as Merrill). The line does not close by paying the balance off. For example, a REIT could have $1 billion outstanding on its $3 billion line of credit. Let's say Merrill underwrites an equity offering to raise $1 billion. Merrill would receive seperate fees for underwriting the offering and the REIT would receive the $1 billion from the funds raised and pay off the outstanding balance. From Merrill's perspective, they will no longer be receiving interest payments if there is no balance outstanding on the line, so I do not agree that this is the scam that people are making it out to be. The REIT can draw down the line again in the future and Merrill and the other syndicates will be required to fund the draws.

Simon Property Group has $3 billion on their line of credit in addition to $1 billion in cash (thanks to the recent equity offerings). Having this amount of availabilty on their line allows them to use the $1 billion in cash to make opportunistic purchases or retire outstanding debt. This will allow them to grow FFO in the long term and will outweigh any short term dilution.

On May 13 09:01 AM dcb wrote:

> So you pay down this line of credit so you can tap it again?
> Does this mean the money being raised by Merrill (lets say) by underwriting
> is going back to the credit line at merrill? wouldn't that be some
> kind of conflict of interest? I raise equity and dilliute shareholders
> to pay myself back?
>
> Please explain?

May 13 09:47 AM

[EJL:]

Throwing all REITs in to the GGP category is as egregious as your claim about ML's underwriting conspiracy, Tyler. I'm thinking you got your head bashed in one too may times in last night's fight. SPG tapped the bond mkt Mon for $600 mln - and that didn't even cross any headlines. There is capital available, I just wouldn't own the equities. Best to own the senior unsecured or some PFD issues.

May 13 10:03 AM

[Donkey Kong:]

So "Mad Money" is your other source of investment information? YIKES!!!! I'm not surprised you pray at the alters of Cramer and Kudlow...


On May 13 07:54 AM Cetin Hakimoglu wrote:

> Cramer may be right. -And the the John Stewart crowd wrong.
>
> ----------------------...
> In either case current investors will long be gone, having sold to
> whatever hot potato holders are the most fervent believers in Jim
> Cramer's economic "fundamental analysis."

May 13 10:03 AM

[EJL:]

"(which they have used almost exclusively to pay down the cheapest form of capital: secured credit facilities: why?)"

Seriously? This is basic stuff, Tyler. Perhaps because the REIT knows that they can tap it again in the future, unlike paying down a mortgage or redeeming a bond, which once paid off, is gone. Maybe in the future the REIT will use the untapped revolver to mature a bond (if they have to) or tap it for an equity kicker to roll a mortgage. It gives them flexibility. Your analysis is myopic here.

May 13 10:14 AM

[gordon:]

Does this mean REIT dividends will be cut? I saw SSS cut by 30%, "starting" in July.

May 13 11:22 AM

[Charles Lie...:]

It makes little sense to bash the REITs for having "staggering near term maturities" and also for selling equity to pay down those maturities. If they have too much debt, then it makes sense for them to delever. You can't bash them for both.
The stocks have done better after being diluted, because investors are fearful the REITs will be unable to roll over their maturing debt, so when they issue common to pay down debt, that relieves a major concern. This is just part of the fallout from the credit crisis. While issuing shares does dilute shareholders, the rally in the stock prices after the stock sales shows that the reduced risk premium for the lowered possibility of default is clearly more important than the dilution. To put this slightly differently, the stock prices fell too far.
Also, the debt being paid down is always not the cheapest form. Sure, credit lines can be paid down immediately, which gives the company lots of flexibility to draw against that line again. But lots of REITs have tendered for debt maturing in '09 or '10 at surprisingly high discounts from par for short maturites. Such transactions enable the company to earn a high return on its cash, while also paying off debt at a discount. But just as importantly, paying off the short-term debt addresses directly the market's concern that the company will be unable to roll the debt. Paying off the debt gets rid of that fear.
As for Merrill Lynch being involved in many deals, who cares? You may be creating an issue that simply doesn't exist. Someone needs to underwrite the deals and Merrill does have a large adviser and client base to sell the shares. Whether the lead or just in the selling group, they would be highly likely to be involved due to their size.
Most importantly, as REITs delever and as credit markets recover, it will become easier for such firms to roll maturing debt. That will reduce the large risk premiums currently embedded in the shares.

(disclosure) I own plenty of REITs personally and for clients)

May 13 11:42 AM

[Just Say Whoa!:]

The First Rule of Fight Club is that People with Deep Pockets don't talk about their losses in CRE.

May 13 12:25 PM

[gordon:]

I ask again, with massive BKs in small biz, malls going 1/2 empty, drive around, see for yourself, are they going to pay the dividends out of this yield that you claim, or from RENTS? I say every REIT dividend is at risk for a 30-50% haircut. Commercial r.e. is only starting to implode, financing or not, retail, office, all are overbuilt and bankruptcies are soaring. No I'm not short. I got laid off from grocery, after almost a year, I know the grocery biz like the back of my hand. They are losing money. Adjacent stores are closing. I drove into Dan Diego where I had my office 9 yrs ago, EVERY strip mall is a ghost town, 30-50% vacant.

May 13 12:27 PM

[donzelion:]

Gordon's points match my own observations: big block stores closing, anchor outlets weighing down rents like, well, anchors. Maybe the baby boomers will discover new sources of money from somewhere, but as incomes shrink and savings rise, I wouldn't expect much from commercial or residential for the next couple years. Financing situation looks a lot to me like the S&Ls of the 70s, which survived in zombie form well into the 80s. The speculators who made their money there were not retail investors, but insiders with special privileges. So it goes in real estate.

May 13 06:36 PM

[Jeffrey Ber...:]

Since when it is it a crime to have debt maturing? Only since the financial system imploded. REITs for the most part are at little risk of defaulting on their loans because their cash flows don't cover debt payments. Of course investors are willing to pony up more equity even at the risk of diluting themselves, rather than have a total loss on an asset that can actually support its debt load. Even in bankruptcy the equity might have value as the maturities would be pushed out...liquidating these entities makes no sense. The maturity default thing has been beaten to death. Yes we could have hyperinflation and an implosion of the world economic systems in the next few years.....if we do there will be much better shorts from here than the REITs.

May 13 07:51 PM

[arksmithdw:]

Regardless of your analysis of Tyler's analysis, here's the question: Given the REAL economic data as reported and not the "green shoots" from Bernanke,Geithner, Obama, CNBC, et al., can we assume that the market has been driven up by Government Sachs so that companies could offload the HIGHEST risk asset class, aka equity, to pay off the LOWER risk asset class, aka debt, as an overall part of the smoke and mirrors to transfer the stupid money over to the smart money?????????

May 13 10:36 PM

[Kinabalu:]

You didn't put RWT on your list. They raised $283 million at the end of January, almost all of which was invested, in the first quarter, in discounted senior mortgage securities. They didn't pay down debt and most of the debt on their balance sheet is non-recourse. They have no current maturities. The interest yield on their mortgage portfolio for the first quarter was 38% of amortized cost. I doubt they are the only REIT like that.

May 14 12:04 AM

[Living4Divi...:]

Tyler - thanks for the post. And thanks for the comments of others. I am curious why no one has mentioned the TALF bailout of CRE Loans?

"TALF program to bolster commercial real-estate lending launches in June

By JEANNINE AVERSA , Associated Press
Last update: May 1, 2009 - 3:26 PM

WASHINGTON - The Federal Reserve announced Friday that it will launch a much-awaited program in June to bolster commercial real-estate lending.

And, to help make the program more attractive to investors, the Fed will provide longer, five-year loans.

Investors would use the money to buy securities backed by commercial real-estate loans.

The goal is to boost the availability of these loans, help prevent defaults on commercial properties like office parks and malls, and facilitate the sale of distressed properties, the Fed said.

The new commercial real-estate component is part of a broader program rolled out in March that aims to jump-start lending to consumers and small businesses called the Term Asset-Backed Securities Loan Facility, or TALF. .... "

Is this a green shoot for REITs ? A better option than delevering is levering up with cheap goverment money.

May 14 05:48 AM