Liquidity, Liquidity, Liquidity REITs Jump on Reviving Stock Markets To Raise Capital and Pay Down Debt By Mark Heschmeyer May 27, 2009 With bank lending a challenge, publicly held property REITs and real estate operating companies (REOCs) have started turning to their investors for a bailout - and are getting it. At least 29 property REITs and REOCs have gone to market with secondary stock offerings in the last two months and have raised or are raising more than $8 billion in new financing - no lender strings attached. The money raised is being primarily used to build up liquidity by reducing the outstanding balances on secured and unsecured lines of credit and repaying loans upon their maturity dates. However, some of the new money is being set aside for future acquisitions, developments, redevelopments and capital improvements, as well. Going into 2009, most REITs cited liquidity as their highest priority because of uncertainty in the credit markets and bank lines expiring this year and next. The latest round of secondary stock offerings is supplementing other efforts the companies have undertaken to enhance liquidity. The other efforts include raising more secured financings, dividend modifications (in the form of cuts, partial stock dividends, and/or suspensions), and asset sales. However, securities ratings agencies have pointed out limitations to those efforts. 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 Ratings. Fitch also noted that many REITs have paid common dividends through a combination of cash and the issuance of new common shares to preserve liquidity, but a dichotomy has emerged with many REITs are preserving capital by choice - but others out of necessity. Moody's Investors Service noted that the asset sales are difficult to complete due to lack of debt capital and investor fear that prices will continue to decline. In addition, Moody's said it expects to see a rise in commercial mortgage default rates, which may distract lenders from originating debt in order to focus on the performance of their existing loan portfolios. On the other hand, the bear market rally that started in late November 2008 seems to have ended in the first quarter of 2009 as concerns regarding the health of the financial sector lessened, according to Duff & Phelps. The stock market rally, which began in March, extended into the second quarter and REITs, for the most part, have outperformed in the revived markets. "In our opinion, the declines in real estate security share prices over the last 12 months have gone a long way toward discounting the challenges the industry faces relative to declining asset values and the higher cost and lower availability of capital," Duff & Phelps wrote in its first quarter REIT review. "Thus, now may be a good time to revisit and rebalance your targeted allocation to real estate securities." Duff & Phelps said it expects to see more REIT management teams embracing the deleveraging process by issuing shares, saying "it is wise to issue equity after a rally has been underway and when such uncertainty remains as to the availability of credit and the depth and duration of the recession." In fact, three REITs announced new secondary offerings as this story was being written. Although certainly positive signs, for now analysts say the supply of equity still dwarfs the need. Citigroup, in a survey of available equity in the marketplace, estimates that REITs would need $35 billion in total equity to bring sector's leverage down to 50% at a presumed 8% cap rate. To reduce leverage to 45% would require $57 billion in equity. "We think the wave of companies looking to raise additional capital is large, however, the likelihood is that the offerings will be coming from the stronger, better- capitalized companies," said Citi. "Most of the companies with low equity values appear reluctant to issue equity at this price, despite the need, as their market caps have sunken below the amounts needed." The following is a summary of the recent stock offerings from major public REITs and REOCs in the last two months. Acadia Realty Trust in New York completed a public offering of 5 million common shares at $11.95 per share. The offering was increased in size from the originally contemplated 4.5 million common shares. The company received net proceeds of $59.8 million. It planned to use a portion of the net proceeds to repay debt, future acquisitions and redevelopments of, and capital improvements. Alexandria Real Estate Equities Inc. in Pasadena, CA, sold 7 million shares at $38.25 per share, upsized from an originally sized offering of 4.5 million shares raising about $268 million. The company intended to use the net proceeds to reduce the outstanding balance on its unsecured line of credit. AMB Property Corp. in San Francisco sold 41.25 million shares at $12.15 per share raising more than $500 million. American Campus Communities Inc. in Austin, TX, sold 9.78 million shares at $21.25 each. The company received approximately $198.7 million in net proceeds that were to be used to repay debt. BioMed Realty Trust Inc. in San Diego sold 16 million shares at $10.40 each. Gross proceeds were $166.4 million. The company expected to repay a portion of the outstanding indebtedness under its $600 million unsecured line of credit with the proceeds. Camden Property Trust in Houston closed a public offering of 10.35 million common shares at $27.50 per share. It received approximately $272.3 million in net proceeds. Cogdell Spencer Inc. commenced an underwritten public offering this week of 18 million shares and granted its underwriters, Citi and KeyBanc Capital Markets, an option to purchase up to an additional 2.7 million shares. The Charlotte, NC-based company intends to use the net proceeds to fund a $50 million repayment under its senior secured term loan, to reduce borrowings under the secured revolving credit facility and for working capital purposes. Cogdell Spencer's stock has been trading around $4.33 share, giving it the prospect of raising more than $80 million. Corporate Office Properties Trust in Columbia, MD, offered about 2.5 million shares at $24.35 each. Net proceeds were to total $63 million to $73 million depending on overallotment sales. The company planned to use net proceeds to repay borrowings. DiamondRock Hospitality Co. in Bethesda, MD, expected to receive $82.1 million in net proceeds from a stock offering, which it intended to use to repay debt. Duke Realty Corp. in Indianapolis, IN, looked to raise at least $480 million through a sale of 65.4 million shares. The company intended to use the net proceeds to repay outstanding borrowings. EastGroup Properties Inc. last week entered into a sales agreement with BNY Mellon Capital Markets to sell up to 1.6 million shares of common stock. Proceeds were not to exceed $40 million. Equity One Inc. in North Miami Beach sold 6.5 million shares publicly at $14.30 each, resulting in $89 million of net proceeds. In addition, it sold Gazit-Globe Ltd. 2.45 million common shares for net proceeds of $35 million. Essex Property Trust Inc. entered into a sales agreement this past week with Cantor Fitzgerald & Co. to sell up to 7.5 million shares of common stock. Essex's shares are trading around $63.58 per share currently. At the price, the company would receive gross proceeds of about $477 million. Forest City Enterprises Inc. in Cleveland, OH, expected to receive net proceeds from its common stock offering of $329.8 million. Forest City intended to use the net proceeds to reduce its outstanding borrowings under the company's $750 million revolving credit facility. HCP Inc. in Long Beach, CA, completed its $440 million public offering of 20.7 million shares. The proceeds were to be used to repay all amounts of indebtedness outstanding under a bridge loan facility, with the remainder to be used for general corporate purposes. Highwoods Properties Inc. in Raleigh, NC, commenced an underwritten public offering this week of 6.67 million shares of common stock including over-allotment options. Trading at around $23.32/share currently, the offering could raise gross proceeds of about $156 million. The company intends to use the money to repay borrowings. Host Hotels & Resorts Inc. in Bethesda, MD, raised $479 million for general corporate purposes and the repayment of indebtedness through its follow on offering. Inland Real Estate Corp. in Oak Brook, IL, closed a public offering of 17.1 million shares at $6.50 per share. The net proceeds were approximately $106.4 million. Kimco Realty Corp. in New Hyde Park, NY, sold more than 105 million shares of common stock at $7.10 each. The company intends to use the net proceeds of $717.3 million for debt repayment and for general corporate purposes. Kite Realty Group Trust in Indianapolis sold 28.75 million shares raising net proceeds of $88.1 million. Proceeds were to be used to repay debt and for working capital. LaSalle Hotel Properties in Bethesda, MD, expected to receive $119.4 million in net proceeds from the sale of its common shares. The company intended to use the money to reduce amounts outstanding under its senior unsecured credit facility and under the unsecured credit facility of the company's taxable REIT subsidiary, LaSalle Hotel Lessee Inc., and for general corporate purposes. Liberty Property Trust in Conshohocken, PA, originally entered into a continuous offering agreement with Citigroup Global Markets Inc. to raise up to $150 million through the sale of common shares. This month it upped the amount to be raised to $300 million. Mack-Cali Realty Corp. in Edison, NJ, completed a public offering of 11.5 million shares. The net proceeds of $275 million were to be used to repay borrowings under its unsecured revolving credit facility and for general corporate purposes. Parkway Properties Inc. in Jackson, MS, sold 6.25 million shares of common stock at $13.71 per share. Parkway intends to use the net proceeds to reduce outstanding borrowings. ProLogis in Denver, CO, topped everybody in raising capital by selling 152 million common shares at $6.60 per share raising gross proceeds of more than $1 billion. The company also granted its underwriters an option to purchase up to an additional 22.8 million shares to cover overallotments. Regency Centers Corp. offered up to 10 million shares of common stock and expected to raise net proceeds of $271 million. SL Green Realty Corp. New York priced a public offering of 17 million shares of common at $20.75 each. The proceeds including overallotment options were expected to be $336.8 million. The company planned to use the money for general corporate and/or working capital purposes, which may include investment opportunities, purchases of the indebtedness of its subsidiaries and the repayment of debt at the applicable maturity or put dates. U-Store-It Trust entered into a sales agreement with Cantor Fitzgerald & Co. to sell up to 10 million shares of common stock. Its stock has been trading around $2.17 per share and its offering was to generate about $20 million in gross proceeds. Vornado Realty Trust in Paramus, NJ, sold a total of 17.25 million shares raising net proceeds of $710 million. Washington Real Estate Investment Trust in Kensington, MD, priced a public offering of 5 million common shares at $21.40 each. Net proceeds were to be about $102.6 million including over-allotment options. Proceeds were used to repay borrowings outstanding under its line of credit and for general corporate purposes. Weingarten Realty Investors in Houston was looking to sell more than 32 million shares at $14.25 per share including over-allotments. The company intended to use the net proceeds of $381.9 million to reduce borrowings outstanding on its revolving credit facility.