REITs Queuing Up To TALF Trough By the Dozen; Debt is the New Equity

REITs cracked the capital markets code this quarter. What looked like one of the biggest incipient financial train wrecks since the Great Depression has turned into a scramble for REIT scrip of almost any stripe. The MSCI US REIT index is up 55% from it’s 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 may already be averting massive, wholesale defaults in REITs and commercial real estate.

And that is the goal. William Dudley, president of the New York Fed, on June 4 underscored the importance of the CMBS TALF program, noting that a continued lack of funding would increase loan defaults and further pressure the capital positions of banks that are holders of commercial real estate assets. Reiterating this, Dudley said the CMBS roll-out is key for the overall success of the TALF program.

So it shouldn’t come as any surprise that the availability of TALF cash has creditworthy REITs scrambling to hock every last speck of unencumbered dirt in search of fresh liquidity, even if (ironically) it’s in the form of even more debt.

There are 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), an Ohio-based retail REIT, could be one of the first REITs to reliquify physical 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.

The properties DDR has identified are either unencumbered or have near term debt maturities. The latter is obviously be a big, big problem for many highly-leveraged REITs, but the new TALF money now looks like it will alleviate at least some of that risk, as is intended.

Developers Diversified hopes to borrow about $300 million against each of these groups and use the money to repay unrelated debt and/or refinance existing mortgages. Simon Property Group (SPG), another retail REIT, is also in line. Either way you cut it, the ability to swap old debt for new debt makes new debt the new equity, and the first deal should close by early September.