Equity REITs in the United States share a critical need for revolving credit or other sources of liquidity, due in part to regulations requiring them to pay at least 90% of their taxable income to shareholders. Despite the credit crunch, most equity REITs have sufficient credit to get by, according to a special report by Fitch Ratings.
Access to unsecured bank facilities is especially important for these companies in the current market environment, Fitch found. “Despite the long-term nature of REITs’ investment in real property and limited working-capital requirements, REITs typically are reliant upon credit facilities to acquire properties and to fund certain development and capital expenditures,” says Steven Marks, managing director and REITs group head at Fitch.
Most U.S. equity REITs, sources of liquidity such as availability under committed bank lines of credit, along with cash retained in excess of dividend payments, are generally adequate with respect to meeting uses of liquidity, such as maturing mortgage debt, unsecured bond maturities, and capital expenditures. “While most equity REITs utilize unsecured or secured debt to finance these activities over a longer time period, access to unsecured bank facilities, particularly during periods of liquidity stress in the capital markets, is crucial to a REIT maintaining a solid financial profile,” Marks says.
Equity REITs are more dependent on short-term liquidity sources such as committed unsecured bank facilities than companies in other sectors because of REITs’ inability to retain significant amounts of cash flow. Paying 90% of income out as shareholder dividends compels REITs to rely upon revolving credit facilities, cash retained after dividend payments and unencumbered assets as primary sources of liquidity, Fitch reports.
Secondarily, most equity REITs access the capital markets to refinance debt maturities and fund larger capital expenditure programs, as primary liquidity sources are typically insufficient to meet these cash needs. The report, Liquidity Focus: U.S. Equity REITs, is available on the Fitch Ratings web site.