Time Running Out for REITs to Maintain Adequate Liquidity

With the unsecured bond market closed for nearly all issuers, U.S. equity real estate investment trusts will likely continue to use a variety of tools at their disposal in order to maintain adequate liquidity, according to a new special report from Fitch Ratings.In the report, entitled, "U.S. Equity REIT Liquidity Update: The Clock is Ticking," Fitch notes that Fannie Mae and Freddie Mac financing remains a key source of capital to the multifamily sector. In obtaining this financing, apartment REITs are faced with the challenge of maintaining strong unencumbered asset coverage metrics while weakening liquidity, or strengthening liquidity and likely weakening quality of the unencumbered pool remaining for unsecured bondholders. Also, many REITs have repurchased unsecured bonds in the open market at discounts to par. While this may be an opportunistic investment opportunity to reduce leverage, such transactions, if large enough, can weaken liquidity if longer-dated bonds are repurchased, according to Fitch. Additionally, many REITs have paid common dividends through a combination of cash and the issuance of new common shares to preserve liquidity.