Patrick Harden

Commercial Real Estate Won't Blow Off Leverage

Let's look at the evidence from these new REITs' S-11 filings:

"We expect to use leverage, directly and indirectly through financing vehicles, to increase potential returns to our stockholders and to fund the acquisition of our assets." [Source: Foursquare Capital Corp. S-11 filing, page 9]

"We expect to use leverage to finance our assets through borrowings from repurchase agreements, to the extent available to us, borrowings under programs established by the U.S. Government such as the TALF and PPIP, and other secured and unsecured forms of borrowing." [Source: AG Financial Investment Trust, Inc. S-11 filing, page 46]

"Initially, we intend to deploy leverage on our target assets, on a debt-to-equity basis, of up to 1.0 to 1.0 on a portfolio basis. If we obtain financing under the TALF or any other U.S. Government programs, we expect to incur significantly more leverage. For example, with respect to the TALF, we expect to finance up to 85% of each of our eligible CMBS assets on a non-recourse basis. When market conditions allow, we intend to finance our first mortgage loans in part through the issuance of AAA-rated CMBS, which we expect should be eligible to be purchased by investors who are able to borrow under the TALF, while retaining the subordinate securities in our portfolio. " [Source: Ladder Capital Realty Finance Inc. S-11 filing, page 11]

I question the viability of these new REITs in my July 14 article: seekingalpha.com/artic...

These mortgage REITs are likely to have substantial taxable income in excess of cash available for distribution, forcing them to borrow more money under unfavorable market conditions or issue even more equity to satisfy the REIT distribution requirements.