Capitalizing With Stock Offerings

WASHINGTON, DC-When Corporate Office Properties Trust and First Potomac recently raised a combined total of more than $184 million in public stock offerings, they became the latest in a series of office REITs to raise money in the market despite the credit crunch and uncertainty of the capital markets.

The list of office REITs and REITs with significant office holdings that have raised funds from stock offerings or announced offerings in recent weeks and months includes $500 million by Long Beach, CA-based Health Care Properties Trust, $212.4 million by BioMed Realty Trust, $195.2 million by Raleigh, NC-based Highwoods Properties Inc. and $149.7 million by Malvern, PA-based Liberty Properties Trust. And, the REITs are raising the funds for a variety of reasons.

Public filings by Corporate Office Properties Trust show that it plans to invest its gross proceeds of $145.8 million from its stock offering to pay down its credit line and general corporate purposes that may include property acquisitions. First Potomac plans to use its $38.2 million in part for a recent acquisition and possibly other deals. Filings by the other REITs cite similar plans for the proceeds of their offerings, in most cases earmarking the funds for paying down debt and general corporate purposes.

The success that office REITs have had in raising funds through stock offerings underscores some of the points in two new recent reports by New York City-based Fitch Ratings. The reports are entitled “Liquidity of US Equity REITs Remains Adequate Despite Market Inactivity” and “REITs: At the Crossroads?”

The Fitch reports see the office REIT sector as stable and “unchanged since the beginning of the year.” One possible reason office REITs have been able to raise funds in stock offerings is that they are viewed, in general, as relatively stable and not saddled with the huge debt levels that burden some companies in other sectors. “For the most part, office REITs have been disciplined in maintaining moderate leverage,” Fitch’s team concludes.

Fitch researchers note the office sector is faced with “relatively limited debt maturities for the remainder of 2008 and 2009.” Despite this general stability, however, Fitch points out in its “Crossroads” report points out that “further erosion in employment growth, particularly in the financial services sector, has weakened property operating fundamentals.” That general weakening will affect some office REITs more than others, Fitch says, so the differences between the strongest and weakest markets in the US should be more evident by the end of the year.

REITs that operate in “supply-constrained markets with diversified employment bases” should remain “less susceptible to downward pressures on rents and slowing demand,” according to Fitch. In contrast, REITs in markets with higher unemployment will face increasing vacancy rates and other negative effects. “Fitch views more negatively those REITs that have exposure to markets in which property owners have less rental pricing power” because of the impact of speculative development portfolios and development pipelines that are adding to the space, the ratings agency’s “Crossroads” report says.

As operating fundamentals in these markets deteriorate, REIT property managers may need to offer concessions and increase tenant improvement allowances in order to retain existing tenants or attract new tenants, the report points out. That, in turn, could reduce the REITs’ overall performance and affect their potential to raise new funds via stock offerings, which have thus far been a welcome source of cash for the industry.