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ARE REITs SLOWING DOWN THEIR BORROWING?

For the past few years, low interest rates have fueled enthusiasm among real estate investment trusts for issuing unsecured bonds. But after a busy first half this year, there are signs the pace is slowing.

Like other corporations, REITs wanted to take advantage of low rates while they remained low. At press time the 10-year Treasury was at 3.51 percent, while the federal funds rate was at a mere 1 percent. But though it seemed for a time that the industry was on track to exceed last year’s blistering pace of issuance, companies may instead be braking on the activity for the rest of the year. By the end of June, REITs had issued $5.9 billion in unsecured debt, close to the amount they had taken out at the same time last year, according to Credit Suisse First Boston.

Typically, this debt is in the form of five-to-10-year notes backed by a company’s credit rather than real estate or other assets. These unsecured deals have always been a handy way for corporations to lighten their debt burden.

The tool became especially useful in January 2001, when the Federal Reserve Board began cutting target bank rates to help the faltering economy. That year the industry issued $9.5 billion in debt, a nearly 50 percent jump from the previous year’s $6.5 billion, and the total in 2002 reached $10.7 billion, according to CSFB.

Among the leading retail REITs that have tapped the unsecured debt market this year are Simon Property Group, which borrowed $500 million in March, and Kimco Realty Corp., which took out $50 million in April. Weingarten Realty Investors, too, has drawn from the well, eschewing even lower short-term variable interest rates for fear they can change at any moment, says Tracey Purcell, the company’s director of corporate communications.

“No one knows how long interest rates will stay low,” Purcell said. “We’d rather lock in where it is now. In the next 10 to 12 years, it is likely that rates will go back up, and we’ll have that protection.”

As Weingarten faces heated competition to buy shopping centers, the company is making sure it will have the financing it needs to bid on desirable properties when they come up for sale, Purcell adds.

But though the first quarter’s $4.2 billion in unsecured REIT bond issuance blew past the $2.4 billion total for the same period last year, things slowed significantly in the second quarter, to about $1.4 billion, according to CSFB.

The fact is, despite all the money available, REITs will not take on debt unless there is an opportunity to use it. Even though Weingarten came to the unsecured debt market seven times between January and February, it used the market sparingly, issuing only $136 million, which is considered small for these deals.

In addition, it’s a real seller’s market out there, and some retail REITs have not been able to acquire as many properties as they’ve wanted, thanks to new competition. Moreover, regulations do not allow REITs to be as heavily indebted as private companies or individual investors chasing the same shopping center deals, says Merrie Frankel, a senior analyst at Moody’s Investors Service. Public companies are not in the habit of issuing debt just to have the capital lying idle, Frankel points out.

“REITs have been paying down their lines of credit [with unsecured debt],” she said. “Are REITs going out for more? Not unless they have a reason for it.”

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MARKET SCANNER Close-out stores are riding high in this challenging economy, notes Marcus & Millichap in its June 2003 Retail Research Report. Dollar General’s same-store sales grew 4.2 percent in the first quarter of this year, while Tuesday Morning’s same-store sales rose 4.5 percent for the same period, according to the report. Analysts predict double-digit sales growth for this segment over the next four years. • The U.S. economic picture may be brightening somewhat, but consumers aren’t, according to the University of Michigan’s monthly Surveys of Consumers. The study’s measurement of current conditions, which gauges consumers’ general take on the economy, rose to 94.7 percent in June from 93.2 percent in May. But at the same time, its consumer sentiment index fell to 89.7 percent from 92.1 percent. The index for future expectations dropped too, to 86.4 from 91.4 percent. Meanwhile, the U.S. Department of Commerce reports that consumer spending rose 0.1 percent in May from April, the most recent data available. • CWCapital, a Needham, Mass.-based lender to the commercial property industry, is expanding its business. The company started a floating-rate bridge loan program to provide loans of between $10 million and $100 million, with terms ranging from 24 to 36 months. The new operation, based in Greenwich, Conn., is called CWCapital Bridge Finance. Kent Daiber is COO. CWCapital will also launch a subsidiary to manage high-yield funds investing in fixed- and floating-rate commercial-mortgage-backed subordinate securities and B-tranche notes from CWCapital and other originators. Further, CWCapital plans to create a mezzanine debt opportunity fund. • REITs headed into the third quarter in top form in early July, delivering returns of nearly 2.8 percent on the Morgan Stanley REIT index from June 30 to July 3. The gain was significant, observed Merrill Lynch, because unemployment rose from 6.1 percent to 6.4 percent meanwhile, as the U.S. economy shed 30,000 jobs. REITs are normally sensitive to unemployment, but they still delivered a 0.5 percent return on July 3 alone. And the index crossed the 500 mark for the first time ever that day, to close at 500.4.

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