November  2008 VOL. 2

Investment Notes

Fitch Ratings says ongoing dislocations in the commercial real estate credit markets have amplified U.S. REITs' short-term liquidity issues, such as near-term debt maturities and capital expenditure funding. While most REITs rated by Fitch have limited near-term debt maturities that need to be refinanced in the capital markets, several companies are accessing the secured debt markets by necessity and on terms less attractive than those in recent years.

Many REITs have accessed the debt capital markets to pre-fund 2009 debt maturities. They've also scaled back development pipelines and have been increasingly prudent in considering stock buybacks under authorized share repurchase programs. Additionally, acquisition activity has been relatively slow during 2008, with many REITs' caution driven by valuation uncertainty and a desire to maintain adequate liquidity and flexible balance sheets.

Over the next 18 months, as many equity REITs face 10-year senior unsecured note maturities, these companies are unlikely to benefit from the current lower interest rate environment compared with 1998-1999 due to significantly wider spreads observed in the existing market. Therefore, REITs that refinance unsecured notes with similar securities at nominally higher yields will provide insight into management’s stance toward maintaining conservative debt maturity profiles.

Fitch says certain larger REITs continue to lead the industry in terms of maintaining strong liquidity, others have meaningfully improved their liquidity profiles and some REITs continue to have liquidity shortfalls. Fitch contends that ProLogis, Vornado Realty Trust, Simon Property Group Inc., and Public Storage have the strongest liquidity positions.