Most Equity REITS Liquid Enough to Ride Out Credit Storm

For most equity real estate investment trusts, existing lines of bank credit and cash flow above dividend requirements will provide enough liquidity to meet short-term cash needs, according to a report released by New York City-based Fitch Ratings.The report, “Liquidity Focus: U.S. Equity REITs,” says that Fitch-rated equity REITs have drawn only 29.8 percent of funds available in bank lines of credit and cash left over after dividends. In addition, less than 20 percent of long-term debt owed by Fitch rated equity REITs will come due over the next 2 years. “Another important consideration is unencumbered assets — assets that can be sold outright to repay unsecured debt,” Steven Marks (pictured), managing director with Fitch to CPN Online today. “We calculated that for every dollar of unsecured debt, a representative sample of investment grade REITs has $2.46 of unencumbered assets. While this is a hard number to generalize, we think that coverage of 250 percent is sound.” In short, equity REITs have adequate liquidity because they haven’t used much available short-term credit. Maturing loans won’t tax existing credit resources for at least two years. And if a REIT does run short, it can always sell unencumbered property. The report evaluated 37 equity REITs rated by Fitch, which is a representative sampling of investment grade equity REITs, according to Marks. While the report’s conclusions deal with the overall supply of liquidity in the investment grade equity REIT world, some REITs do not have enough equity. Of the 37 REITs evaluated in the report, 17 have liquidity shortfalls. The report concludes by noting that a prolonged contraction in the liquidity markets plus rising costs for issuers “may have consequences for REITs’ ability to access capital.”