A new survey observes that most REITs plan to take a conservative approach to financing and growing their businesses in the coming years.
E&Y Kenneth Leventhal Real Estate Group (EYKL), the real estate arm of Ernst & Young LLP, and Bear Stearns, the global investment bank, announced the summary results of their first comprehensive REIT survey. The full survey—distributed only to the participating respondents—was designed to gather pertinent attitudes, sentiments and policies across the board universe of 180 equity REITs. Thirty-two percent of REITs responded to the survey, representing a broad cross section of the industry by total market capitalization, property type and overall leverage.
The responses were collected through the first quarter. The results portray an industry that remains somewhat pessimistic about the prospect of raising significant capital from the equity markets, yet conservative in accessing debt to fuel growth. REITs intend to use off balance sheet financing tools and joint ventures with institutional and other capital sources.
While most REITs surveyed anticipate moderate growth over the next few years, few expect explosive growth. Keith Locker, senior managing director of Bear Stearns, points out that the survey shows REITs far more comfortable in assuming high levels of debt—above 50 percent—outside the REIT in joint ventures than they are within the REIT structure itself.
Larry Kaplan of Ernst & Young real estate group observes that all of the property sectors surveyed—except healthcare REITs—responded that they intend to increase their joint venture activity. "It's the smaller REITs that receive a disproportionate upside from the JV structure itself," says Kaplan.
While most REITs are taking a conservative tack, more than 70 percent of respondents have debt maturing after 2003. "There is likely to be a great deal of refinance activity," says Locker.
Some 70 percent of REITs responding to the survey indicated that they planned to establish taxable subsidiaries under the REIT Modernization Act, which becomes effective January 1, 2001. Most of these subsidiaries, the survey indicated, would relate to traditional real estate services.
"Only 22 percent of REITs responding to the taxable REIT subquestion indicated they plan to establish telecom-related subsidiaries," Kaplan notes.
