Highly levered REITS face pressure to sell amid tightness in CMBS market, banker and industry analysts say07 January 2008

Highly levered real estate investment trusts are facing pressure to sell because of tightness in the Commercial Mortgage Backed Securities market, according to a banker and industry analysts.
The tightness in the CMBS market may lead to difficulty for highly levered REITS to finance growth, sparking a potential sell-off, the banker and the analysts agreed.
Commercial REITS - which include retail, industrial and office - are particularly vulnerable, the analysts said. These REITS cannot access Fannie Mae and Freddie Mac like residential REITS, they said. However, highly levered residential REITS may also be at risk to sell themselves, the first analyst added.
Likely targets are California-based, NYSE-listed Maguire Properties, an office property REIT; and Illinois-based, NYSE-listed General Growth Properties, a shopping center REIT, the analyst said. These companies will have difficultly obtaining financing because they are levered at 60% or higher, the analyst said. According to the analyst, even a residential REIT such as Ohio-based, NYSE-listed Associated Estates, an apartment REIT, could face pressure to sell itself because of the high amount of its leverage.
REITS of all types that are highly levered could have difficulty sustaining themselves and may need to strongly consider selling, the analyst said. Companies levered at 70-80% may be among sellers, depending on how much of the company’s debt is short term, the analyst added. Less levered REITS will not have a problem obtaining financing, according to the analyst. Virginia-based, NYSE-listed Avalon Bay, an apartment REIT, is an example of a less levered REIT at 20%, the analyst pointed out.
Associated is probably viewed as a target by its competitors, according to Michael Lawson, vice president of investor relations at the company. However, he declined to say if Associated views itself as a target. “Associated is a small fish compared to its competitors,” Lawson noted. Competitors include Post Properties, Mid-American, Colonial and Home Properties, he pointed out.
Maguire is feeling effects of the CMBS market and is “reviewing strategic alternatives,” according to Peggy Moretti, senior vice president of investor relations at the company. It has engaged Morgan Stanley for financial counsel and Skadden, Arps, Slate, Meagher & Flom LLP as its legal counsel, she added.
The banker said that recently his real estate team has been fielding calls from various mid-tier REITS wondering if they were “viable in the post-credit crunch world.” REIT executives are asking where they will find equity and debt capital to stay in business, according to the banker.
The CMBS market is expected to continue to face backups, and it is largely shut down at this point, the second analyst said, declining to specify a timeframe.
If the tightened CMBS environment persists, the current set of “quiet discussions” among REITS will turn into full-fledged sellside assignments, the banker said. Several REITS are already looking around for potential marriage or joint venture partners to answer that question, the banker added.
Many companies associated with the subprime mortgage business are in Orange County, including Countrywide Financial, the banker said. Maguire is difficult to value because several tenants are involved in the subprime turmoil and may vacate, the banker added.
The increase in foreclosures and declining value of residential real estate encourage more renters, potentially benefiting Associated, Lawson said.
General Growth Properties could not be reached for comment.

by Rebecca Wenzel and Mike Stone

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