REITs Continue Selling Equity

In an effort to raise cash, REITs continue to tap the capital markets through new equity sales. Highwoods Properties (HIW), an office developer, is the latest REIT to announce an equity offering. The company plans to raise about $125 million through the issuance of new shares.

Earlier this month, HCP, Inc. (HCP), a health care operator, closed a $440 million offering. So far in 2009 (excluding May), according to NAREIT data, REITs have raised a combined $8.7 billion of capital through common share sales, vs. $11.1 billion for all of 2008.

April was by far the busiest month, with $6.4 billion of stock sold - the highest monthly amount in years. With secured and unsecured debt becoming more expensive and harder to obtain, companies are biting the bullet and selling equity at depressed prices. The mini REIT rally over the past quarter has also helped.

Most of the proceeds are being used to shore up balance sheets by paying down debt. Companies with higher leverage have been punished, and their share prices have dropped at a faster pace. In the past, companies could sell properties to raise cash, but with property prices declining and very little transactional activity, this is now not a great option.

Going forward, equity REITs will use less leverage, which will lower returns, and thus earnings, but will make safer investments. While we are generally positive on equity raises to pay off debt, companies that sell new shares are most likely to cut their dividends. Many REITs have already cut their dividends this year.

Expect more cuts as 2009 progresses. There is no evidence that commercial real estate has stabilized, and fundamentals are declining in most sectors.

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