Have Real Estate Investment Trusts Overkill With Bank Loans?
According to a new report from Fitch reviews, the US REIT industry has seen a “significant” increase in commercial bank borrowing in recent years. As at December 31, exposure to bank borrowings, including outstanding on unsecured revolving credit facilities and term loans, represented 16.5% of total industry debt, compared to 18.8% a year ago. year. Yet it sits near a 10-year high and remains well above the 8.5% at the end of 2010.
Why should you care? Real estate is a capital intensive business. Authors of the report Steven Marques, Zachary klein and Kellie Geressy Nilsen warn that already high exposure to commercial bank borrowings may not only hurt credit ratings, but will leave some companies with less “dry powder” in terms of financing options if credit begins to tighten.
REITs need constant access to capital markets, as commercial real estate is capital intensive and REITs cannot maintain significant levels of liquidity due to the required dividend distributions. Access to multiple forms of capital is a hallmark of high-quality REITs, and if unsecured bond markets weaken, REITs would find it harder to resort to additional unsecured bank borrowings. Fitch takes a negative view of companies with less mature capital structures that rely on fewer sources of funding and the inability of issuers to secure profitable unsecured funding through the bond or bank market could result in downgrades or changes. negative outlook.
In addition, in a troubled scenario, an issuer may give preference to or offer stronger forms of collateral to bank lenders to the detriment of unsecured bond holders, despite bank loans and unsecured bonds classified pari passu. This preferential scenario becomes more likely as issuers increase their bank loans relative to other debts.
Rating agencies monitor the use of bank loans and revolvers. So far, bank borrowing levels have not been the cause of any downgrade or negative credit rating actions. Fitch says the use of unsecured guns remains “disciplined.”
Still, the high level of bank lending comes at a time when the bond market is quite strong. Why? The banks have been aggressive in finding new businesses and are offering five- and seven-year loans. Additionally, smaller, less experienced REITs often use unsecured term loans as a “first step” to becoming fully-fledged unsecured bond issuers, especially if they mostly have encumbered portfolios.
Until about a month ago, REIT stocks were under pressure amid fears of rising interest rates. Like utilities, stocks are used as a proxy for bonds. But in the United States, commercial real estate has recovered.
by BlackRock iShares Real Estate in the United States (IYR) climbed 4.5% over the past month and Vanguard REIT Index Fund (VNQ) gained nearly 5.1%.