Banking, finance, and taxes

Are Banks Getting Overextended on Credit to REITs?

Jon C. Ogg

Published: June 2, 2016 12:55 pm

Last Updated: January 13, 2020 7:16 am

It almost doesn’t matter what aspect of banking the nation’s large banks cater to anymore. Credit risk is credit risk, from exposure to oil and gas, to manufacturing, auto companies and small business. Now there may be a growing concern.

24/7 Wall St. would like to remind its readers that there are many estimates on just how much commercial real estate space is simply not needed.

Fitch Ratings has warned that U.S. real estate investment trusts (REITs) are still taking advantage of a favorable bank lending environment. The group warns that there are signs of more risk now emerging. What Fitch is really pointing out is that unsecured revolving lines of credit have remained a critical capital source for REITs. They are used primarily to fund acquisitions and development, generally before a REIT taps the debt market or sells shares equity markets.

Fitch also said that it expects renewals to remain favorable to borrowers for the foreseeable future. This is as spreads decrease and commitment sizes increase. All in all, the verdict is that the overall banking exposure to debt capital structure risk is inching up.

Fitch’s Managing Director Steven Marks said of the bank exposure to REITs:

There has been an increase in revolver draws brought on primarily by recent capital market volatility. Coupled with higher term loan usage, this is a clear sign that REITs are relying more on bank capital.

Bond market volatility is also causing several lower rated REITs to accept unfavorable pricing when they come to market with new debt or pull debt offerings altogether and access the term loan market. Higher rated REITs haven’t been immune to the recent bond market volatility, having to use unsecured term loans to pay off revolvers to navigate through capital market turbulence.

This might not mark any serious risks for REITs, and it will of course be quite some time before the effects of the retail sales migration moves to Amazon and other online sources has reached equilibrium. Whichever way this ends up, there are many sectors outside of retail that are covered by REITs: office space, warehouse, mixed use, industrial and on and on.