Over the last few days we have seen two REITs come to market with debt, Liberty (LRY) and Washington (WRE). Aside from obvious differences in region and property types, there is another interesting difference: their covenants.
The LRY covenants did not exclude JVs from total assets while WRE did. Where I come from, the JV carve is the better of the two and as a result I have one question:
Why don't investors demand better covenants?
Is the current market that much of an issuers market that investors can't push back for better covenants - especially ones that have been used in the recent past. We are not talking about new covenants, just created, onerous and restrictive.
As a former institutional investor that was a larger investor in REITs and other debt (public and private), I realize that there are funds that have to be put to work and it can be difficult to say "covenants or no deal". You might miss the deal (yeah, there is always someone who will come in and buy it - fast money...). It reminds me of the same issues with COCs when the COC White Paper was developed (you can find it here: www.iimemberships.com/creditroundtable/Element.aspx). People wanted the covenant in all new deals written in specific terms but would not turn back deals without the COC and/or the language.
Don't complain if you will not stand up for yourself, your portfolio and/or the ultimate client. Its funny, whenever a REIT would come to a group (the "REIT Mafia", a group made up primarily of insurers) looking for a modification, the group would push for new covenants to protect themselves and to extract their pound of flesh. Good times, I am a fan of investor activism, to be sure. But why not try to get good covenants to begin with? There are larger investors that do large enough size where they could make it happen. Well, make it happen.
Lets not wait for things to blow up to try to protect our interests.
Sorry if it seems I am ranting, but why let issuers didtate terms. Have we learned nothing?
Disclosure: Long various reits, but none mentioned above.
REITs and Covenants
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