News that Developers Diversified Realty, one of the largest REITs in the retail sector, is considering using the Term Asset-Backed Securities Loan Facility (TALF) program to secure up to $600 million in loans might help the program gain popularity.
Under TALF 2.0, as industry observers have dubbed the revamped program, potential investors in new commercial mortgage-backed securities (CMBS) can borrow money from the government to buy AAA-rated CMBS bonds issued on or after Jan. 1, 2009. However, the program’s initial deadline of June 16 passed without any loan requests. Now, with companies of Developers Diversified’s stature and portfolio quality expressing interest in using TALF, the hope is the program could get a boost. What’s more, if Developers Diverisified proves successful in its quest for TALF-sponsored CMBS financing, many other REITs could follow its lead.
There were already a number of investors expressing interest in using TALF for new loans during NAREIT’s REITWeek event, which took place from June 3 through June 5, says a NAREIT spokesman. But last week, reports surfaced that Beachwood, Ohio-based Developers Diversified, which operates a 156-million-square-foot U.S. shopping center portfolio, has plans to use two separate portfolios of mostly unencumbered properties to secure between $300 million and $600 million in loans sponsored through TALF. It will reportedly use the proceeds to pay down debts scheduled to mature over the next three years. The REIT is reportedly working with Goldman Sachs and Citibank to help arrange buyers for the bonds who will be backed by TALF funds.
Developers Diversified currently has a total debt load of close to $7 billion, with a total debt to market capitalization ratio of 85 percent. More than $2 billion of those loans mature in 2010, followed by $1.5 billion in 2011 and $900 million in 2012. (Developers Diversified executives did not return calls for comment.)
Simon Property Group, an Indianapolis-based REIT with the largest retail portfolio in the country at 246 million square feet, has also been mentioned as looking into TALF lending options. A spokesman for Simon declined to comment on the matter.
The TALF program has the potential to create a new funding source for REITs and other real estate owners by lending investors money to buy newly issued AAA-rated bonds backed by commercial properties. By doing that, it could open space for owners to secure new CMBS loans on unencumbered assets and use the proceeds to pay down outstanding debts. (NREI reported on TALF's expansion last month and our May cover story looked at the implications of many of the government's programs on retail real estate.) The TALF program is important because in recent months, new loans from most real estate funding sources have been hard to come by and CMBS financing has been all but non-existent. After 11 consecutive months of no new CMBS issuance, in June issuance rose to $100 million, according to Commercial Mortgage Alert, an industry newsletter. By contrast, at the height of the market in June 2007, CMBS issuance totaled more than $37 billion.
The trick now is that to make the TALF program work for new CMBS loans, investors have to feel they are getting a sufficiently high return on CMBS bonds—with the starting point of at least 10 percent for five-year bonds in today's market, according to Michael Magerman, senior vice president for Realpoint LLC, a Horsham, Pa.-based credit rating agency. Year-to-date, AAA-rated CMBS bonds have registered total returns of approximately 7.4 percent, reports Commercial Mortgage Alert.
"The question marks have to do with whether the investors would be willing to show up and go through this program and hold hands with the government," says Jon Southard, principal and director of forecasting with Torto Wheaton Research, a Boston-based real estate research firm.
What might draw more investors into the game is the fact that properties currently being offered as collateral for new CMBS loans tend to be well-performing, core assets, rather than second-rate centers, according to Frank Innaurato, managing director of analytical services with Realpoint. Innaurato notes his firm has recently worked on several potential TALF transactions initiated by smaller REITs players who could not be named. Another factor that could make the offerings attractive is that they would be simpler for investors to understand than some of the complex securitizations done at the peak of the market.
"The smaller players [and Developers Diversified] will be almost like guinea pigs to see how things will go forward," he says. "We feel that interest will remain very high among REITs to take advantage of the terms being offered by the TALF program. Most likely, we will see more of this to come."