Banks seeking high-quality commercial loans and a volatile bond market have driven a surge in lending to U.S. real estate investment trusts, according to CreditSights Inc.
“The volume of new REIT unsecured term loans originated through mid-April this year has already surpassed all of last year’s record,” Craig Guttenplan, an analyst with New York-based CreditSights, said in a research note today.
The pace of borrowing among REITs has picked up since last summer as investors are more comfortable lending to a portfolio of assets rather than against individual properties, according to the report. CreditSights sees unsecured loans becoming a more prevalent source of financing for smaller trusts and weaker credits because the debt is cheaper than bonds and has more flexible terms.
“The flexibility around a repayment date and ability to extend loans are particularly important since the bond market can be fickle and borrowers can potentially be shut out for more than just a brief period,” Guttenplan said.
The liquidity “crunch” after the failure of Lehman Brothers Holdings Inc. in September 2008 underscored the risk REITs face refinancing bonds, and the importance of maintaining liquidity because their dividend requirements limit ability to retain cash flow, according to CreditSights. General Growth Properties Inc., the Chicago-based shopping mall owner, went bankrupt in April 2009 after it failed to refinance debt.
Volatile Bond Market
A volatile bond market in the third quarter drove the recent rise in term loan lending to REITs, along with their “steady need for capital” to make new investments and fund debt refinancing, according to the report. Bank demand for “high quality commercial loans” is also behind the increased pace of borrowing among REITs, even as commercial real estate loans for individual properties continue to shrink, according to the report.
“Weaker credits have generally seen a significant borrowing cost advantage in the bank loan market versus the bond market in the current environment,” Guttenplan wrote in the report.
He cautioned that “one disadvantage” for REIT bondholders is that loan covenants are typically tighter than in bond indentures and may be more easily beached.