REITs already have an advantage over most of their private peers when it comes to raising capital. But a few of the companies in the apartment REIT world are trying to add more quivers to their capital arrow.
Austin-based American Campus Communities (ACC), Memphis-based MAA, Birmingham, Ala.-based Colonial Properties Trust, and Cleveland-based Associated Estates Corp. (AEC) are actively seeking investment grade ratings, according to REIT analysts. “There’s big move to get their investment grade ratings to tap the unsecured [debt] market,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm.
Diversity is one of the drivers. “Companies want access to the unsecured market because it gives them a wider capital menu and increased flexibility of their capital structure,” says Andrew J. McCulloch, a senior analyst for Newport Beach, Calif.-based Green Street Advisors.
And at some point, that could come in handy. “While both the unsecured and secured markets are wide open today, this may not be the case in the future,” McCulloch says. “Also, the highest-rated borrowers among the apartment REITs—AVB [Arlington, Va.-based AvalonBay Communities] and EQR [Chicago-based Equity Residential]—can borrow in the unsecured market today cheaper than they can in the secured market. This is a significant advantage.”
In fact, New York-based Fitch Ratings recently assigned MAA an initial rating of 'BBB' in June. The company wants to broaden its access to capital as much as possible. “Having broader access to more capital hopefully lowers your cost of capital,” says Al Campbell, MAA’s CFO.
Campbell also hopes that it helps position MAA for future growth. “As we begin to deal with the CMBS market and all of that stuff over the next four and five years, maybe the public companies may have an advantage with access to unsecured markets as some of these assets get loose and begin to get absorbed,” he says.
The ratings agencies look at a REIT’s overall leverage, debt to EBITDA, percent of unencumbered assets, and a host of coverage ratios, among other things. In fact, Campbell says each agency has its own criteria. Right now, MAA is seeking investment-grade rating from a second ratings agency. “The key is you need to have a certain amount of unencumbered assets,” he says. “Investors buying at general corporate credit quality want to make sure they have unencumbered assets if things go negative.”