Maryland Business

By: jackie.sauter

We just got a copy of a report about real estate investment trusts in our inbox from Advantus Capital Management titled “Follow the Debt: Public debt markets could predict REITs’ direction,” which predicted, frighteningly, “a staggering amount of real estate debt maturing in 2009.”But it’s not like we didn’t know about this already. Late last year, General Growth Properties, the country’s second-largest mall owner, announced it was selling off every one of its Baltimore retail properties that are worth a dime, plus Faneuil Hall Marketplace in Boston and New York’s South Street Seaport. Plus, there’s the whole recession going on, and it’s not as if anyone related to real estate is going to have an easy time paying the bills this year. It’s like a Baltimore-based real estate broker we know always says — “We build houses around economic activity” — when there’s no economic activity, how do you pay for the house?

One particularly interesting part of the report, however, was this:

The good news is that REITs may have a competitive advantage. Generally, REIT debt leverage ratios going into the cycle were much more manageable than their private commercial real estate counterparts. While the typical REIT had debt to total capitalization of roughly 45 percent, the typical private commercial real estate investor borrowed at loan-to-values (LTV) of 75 percent. With a turnaround in the capital markets, REITs are poised to once again tap into capital, though not as cheaply as in the past.

That means that most publicly-traded REITs are carrying debts that amount to less than half of their market cap, while smaller, private companies borrow quite a bit more than that. In other words, in the future, more big buildings will be owned by large, publicly-traded REITs rather than small, local property investors.

But a recent report by the investment analysts at Stifel Nicolaus sort of contradicts this. Some REITs, like those that specialize in healthcare-related buildings have very low debt-to-capitalization rates, but most others are much more highly-leveraged. ProLogis, the world’s largest warehouse owner, which has 18 properties in the Baltimore-Washington area, has a 73 percent debt-capitalization ratio. Consequently, that company is in trouble — in November, its CEO quit after the company’s shares lost 90 percent of their value in what the Wall Street Journal called “another sign that manufacturers and retailers are becoming more pessimistic about the economy.” Some prominent REITs that focus on office and industrial space, including AMB, Monmouth and Columbia-based Corporate Office Properties Trust, are carrying close to 50 percent or above in debt-capitalization.

“As a practical matter, the REITs have maintained a much higher equity to debt ratio because that was what was determined by Wall Street,” said Joe Casey of the brokerage Cushman & Wakefield’s Baltimore office.

Still — the amount of debt that these companies are carrying is actually quite conservative, compared to other types of investment-based businesses. For example, when investment bank Bear Stearns collapsed last year, its assets were leveraged about 33 times over, meaning its debt-capitalization rate was somewhere north of 3,000 percent.

ROBBIE WHELAN, Business Writer