REITs cracked the capital markets code this quarter. What looked like the biggest incipient train wreck since the Great Depression has turned into a
scramble for REIT scrip of almost any stripe. Some REIT stocks are up 50% from their March lows, and $15 billion in credit lines have been issued and refinanced with equity faster than slum dog can phone a friend.
This is not be entirely surprising: REITs always lead the private market into and out of real estate recessions, but the alacrity of this recovery probably has champagne corks ready to fly at the Fed. While the Fed's first deadline for issuers seeking TALF funds for CMBS passed this last Tuesday without any takers, all of this REIT stock activity has been in anticipation of REITs being able to borrow again, finally...even if it's from a government-subsidized bailout fund.
Gushers of TALF cash cannot arrest the inevitable
bust in commercial real estate prices, but government liquidity can and evidently has headed off
massive, wholesale defaults in REITs and commercial real estate.
The availability of TALF cash has creditworthy REITs scrambling to hock every last speck of unencumbered dirt in search of fresh liquidity, even if it's in the form of new debt. There at least a dozen REITs working on TALF deals, including a number of Mortgage REITs ready to re-pledge AAA CMBS collateral. One such Mortgage REIT,
Dynex Capital (
DX) estimates that it can re-pledge existing AAA CMBS to the Fed through TALF and get a funding pickup of 800 bps in the process.
Developers Diversified Realty Corp. (DDR), a retail REIT, could be one of the first REITs to reliquify assets through TALF. According to the
Cleveland Plain Dealer, DDR is working with Goldman Sachs and Citibank to prepare two groups of properties -- each worth about $800 million -- as collateral for new TALF loans.
DDR has identified two groups of properties that either are unencumbered or have debt maturing by the end of Q3. Developers Diversified hopes to borrow about $300 million against each of these groups and use the money to repay debt or refinance existing mortgages. Either way you cut it, old debt for new debt makes debt the new equity, and the first deal should close in September.
