Tuesday, May 12, 2009

The REIT Maturity Crunch In Perspective

As Zero Hedge's all time favorite investment bank Merrill Lynch is all too happy to attest, the REITs have proven to be a phenomenal source of underwriting revenue. Amusingly, the REITs which face staggering near-term maturities are still unable to access the debt capital markets (with one or two notable exceptions), yet have raised well over $10 billion in equity to date (which they have used almost exclusively to pay down the cheapest form of capital: secured credit facilities: why?) leaving one to truly wonder just what is the big picture here really all about (aside from ML pocketing dilution cash). So just how far down the road are recent equity raises going to take the (still) very troubled REIT space? (Why still? Redo the FFO calc with a 9% cap rate. Come back then). Answer- not all that far.

Below, I present a summary of the most notable REIT follow on offerings done in the past 2 months: as one can see the amount raised is staggering, and the main lead underwriter (sole or joint) by a vast margin is Merrill Lynch.

The two immediate take home messages here are that despite an average 24% dilution for REITs which have undergone the ML Cohen and Steers treatment, they have still outperformed the general REIT universe in price appreciation (P/FFO) by a factor of almost 300% (8.4x to 9.6x for broad universe compared to 11.7x to 14.4x for the diluted names). Odd you say?

And while the chart above shows not only the ridiculous prominence of ML in the pantheon of busy little underwriters, it also demonstrates just how much capital REITs have raised to date. The reason of course is the imminent maturity schedule for the vast majority of these. The chart below shows the 2009-2011 maturity schedule for the bulk of the major REITs split by category. One can see that based on just these main 15 companies, there is almost $20 billion in upcoming debt maturities over the next 3 years, which explains why any and all REITs will take advantage of every single orchestrated market bubble from now until they ultimately follow in the shoes of GGP, to sell the pieces of paper better known as common stock.

In other words, mother Merrill will likely not stop (and the market squeeze will likely not loosen) until there is at least another $10 billion in additional dilution from the remaining usual REIT suspects (and until ML has pocketed at least another $100 million in underwriting fees). Even so, I have not disclosed the 2012-onward maturities, where things really start to get interesting. But by then, as everyone knows, we will either have hyperinflation, and all the REITs' exiting debt would be payable down with one mere $1 trillion bill, or the S&P will be at 6.66, in either case current investors will long be gone, having sold to whatever hot potato holders are the most fervent believers in Jim Cramer's economic "fundamental analysis."

hat tip IMA5U, Chart data sourced from www.creditsights.com
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