Fitch: REIT Structure Reinforces Conservative Financial Policies
NEW YORK -- February 5, 2013
With the fiscal cliff on the horizon, corporate entities issued
record-breaking amounts of special dividends in December 2012 to take
advantage of lower tax rates while continuing to exercise share repurchase
REITs, on the other hand, have continued to avoid many shareholder-friendly
activities. The primary driver has been REIT requirements to distribute at
least 90% of taxable income as dividends. This inhibits REITs from
accumulating large cash balances via free cash flow to pay special dividends
or conduct share repurchases. Additionally, REIT bank covenants may restrain a
REITs' ability to make certain restricted payments. Notable exceptions since
2006 include Equity Residential increasing leverage to repurchase $1.2 billion
of shares in 2007, and AIMCO repurchasing nearly $800 million of shares in
2007-2008. Nonetheless, given these structural restrictions, Fitch does not
expect sizable share repurchases or special dividends over the near-term.
Aside from these restrictions, REITs continue to maintain prudent financial
policies and mostly conservative views on leverage, which Fitch expects to
continue over the near-term. Many entities should continue to grow their
portfolios on a leverage-neutral basis and issue sizable amounts of equity to
finance acquisitions and development. This was evidenced by Equity
Residential's $1.2 billion common equity issuance/continued asset sales to
finance a substantial portion of its Archstone acquisition, and Digital
Realty's ?716 million acquisition of the Sentrum portfolio, which was financed
primarily with an approximately $830 million common equity offering.
The REIT structure also implicitly enhances management discipline with respect
to capital allocation. Since REITs are unable to retain sizable amounts of
cash flow, they are much more dependent on accessing the capital markets than
standard corporate borrowers. As such, REITs essentially require tacit
approval from investors to invest new capital in acquisitions and other growth
opportunities, whereas standard corporate entities lack this implied market
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The above article originally appeared as a post on the Fitch Wire credit
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opinions expressed are those of Fitch Ratings.
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