Moody’s Analyst Says REITs Using Unsecured Debt to Refinance Portfolios

Merrie Frankel, vice president and senior credit officer at Moody’s Investors Service, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.

Frankel offered insights into the increasing number of REITs that are obtaining investment-grade credit ratings. She emphasized that liquidity in the market is an important factor.

“It’s access to the public debt market. It’s the ability to finance your assets, your growth, your company with the best instrument at the best spreads,” she said.

Frankel also reviewed how REITs are incorporating debt into their capital structures.

She noted that REIT debt issuance in 2014 has already topped $23 billion. Frankel added, however, that most companies that are issuing unsecured debt are using it to pay off maturing unsecured debt, term notes and mortgages with the goal of refinancing their portfolios.

“We have seen fixed-charge coverage going up, net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) going down, and a lot of the metrics going the right way,” she said.

Looking to 2015, Frankel said one development she will watch closely is the issuance of commercial paper by REITs.

REITs in the United States had never issued commercial paper until Simon Property Group, Inc. (NYSE: SPG) established a global unsecured commercial paper note program in October, according to Frankel.

Frankel said that although Asian and European REITs have been issuing commercial paper for many years, Moody’s has never been fond of the practice.

“You are basically financing long-term assets with short-term debt,” she noted. “It’s going to be interesting to see how that plays out over the next year or so.”