WHETHER IT WAS PROPER planning or dumb luck, BRE Properties, a San Francisco-based REIT with 21,808 units, made some financial moves in 2007 that look pretty good in hindsight. It took down a few hundred million in debt at 5.5 percent interest and also restructured its $750 million line of credit to 2010 at 47.5 basis points over LIBOR. Finally, it started selling properties in 2007 and increased its pace of sales in 2008.
That's given BRE a cash barrier to brace itself for what could be an explosive 2009. In fact, the firm has only a couple hundred million maturing in 2009 and 2010. “We have enough liquidity and balance sheet capacity to easily get us through the next two years,” says Ed Lange, chief operating officer for BRE. “Our focus is on adding liquidity and capital by 2010.”
The Connor Group has effectively pushed its loan deadlines into the future as well—less than 5 percent of the Dayton, Ohio-based firm's loans expire in 2009. “You don't want to have loan expiration and rate expiration,” says company CEO Larry Connor.
Michael Stewart, CEO of Irvine, Calif.-based Pacific Property Assets, has an even longer horizon. He's looking out 30 to 36 months, putting longer maturities on all of his deals. “That's the period we have to figure out a way of covering,” Stewart says. “Many people will not have full liquidity for 36 months. You don't want to have no dry powder or low dry powder. I'm more conservative because I don't think the financial markets will be bouncing back as fast as we would like.”
The capital market is also forcing him to take a more conservative approach with his investors. “This market slowed down the refinancing activity, which is historically our main source of repaying investors,” Stewart says.
Instead of negotiating a two-and-a-half-year horizon with investors—as he did during the height of the market—Stewart is putting a five-year horizon on his deals with equity sources. “We want to make sure we have wiggle room if the market stays bad,” he says. “With investors, we promise with a handshake to get their money back in a timely manner.”
Unfortunately, other companies weren't as proactive about shoring up their balance sheets against the recession. Now, they're more concerned with adding cash in 2009 than pushing maturities to 2012. And it will be even more difficult to make major moves this year.
Still, there is an opportunity to raise cash, especially if you're in good markets. With Fred-die Mac and Fannie Mae, property sales are occurring in the multifamily arena. The downside is that valuations are well below where they were two years ago. “Our planning for next year assumes that we don't think 2009 will be a good year to be a seller,” Connor says.
If you have a project in need of capital, there are plenty of mezzanine lenders sitting on the sidelines ready to inject cash to provide a cushion, but that has a downside as well. “The typical private firm will face a 15 percent to 30 percent gap to refinance,” BRE's Lange says. “They will have to turn to mezzanine. A lot of private capital is looking at mezzanine. But it will require subordination of their equity to support and attract mezzanine capital.”
EQUITY RESIDENTIAL
A lot of REITs are taking steps to shore up their balance sheets for a rocky year. But if you ask analysts, Equity Residential, a Chicago-based REIT with 147,326 apartment units across the country, is one of the leaders in the sector.
In August, Equity closed on a $550 million secured loan originated by Wells Fargo for repurchase by Fannie Mae. In March, it closed on a $500 million secured loan originated by Wachovia Multifamily Capital for repurchase by Freddie Mac. The company also shelved a couple of projects in its pipeline and didn't make a single purchase in the third quarter of 2008—the first quarter in its history without any transactions—pulling its full-year acquisition expectations to $400 million from a second-quarter level of $750 million. And by the end of 2009, it will likely have approximately $750 million available before any proceeds from property sales.
