U.S. real estate investment trusts (REITs) and real estate operating companies (REOCs) saw high levels of issuance and largely positive rating activity last year. But the same cannot be said about homebuilders, who experienced continued weakness and more downgrades than upgrades, a recent report by Standard & Poor's Ratings Services.

"Propelled by REITs, U.S. real estate companies together issued a record-breaking $27.7 billion of debt and preferred stock in 2006," writes Standard & Poor’s credit analyst Elizabeth Campbell. "In addition, continued strong investor support lifted shares of the largest public equity REITs over 35% in 2006, resulting in the seventh consecutive year of relative equity outperformance."

In contrast, homebuilder stocks were down roughly 20% for the year as challenging conditions continued to quell investor interest in the sector, although prices improved from the second quarter trough. "Homebuilder debt issuance actually fell during 2006, as no builders tapped the public markets in the second half of the year," writes Campbell.

Standard & Poor's upgrade/downgrade ratio for REITs was high at 2.5 to 1 despite the wave of M&A activity that hit the sector, thanks to bondholder-friendly covenants that buffered against what could have been meaningful downgrade activity.

Homebuilder rating actions, on the other hand, were decidedly negative, reflecting the housing market's sharp correction. Downgrades exceeded upgrades 2 to 1, reversing the trend in the past several years of builder upgrades exceeding downgrades.

Standard & Poor's outlook on the majority of its rated REITs and homebuilders continue to be stable, although the bias remains positive for the former and negative for the latter.