EQR Equity Residential

By Konrad Putzier 

More publicly-listed real-estate companies are taking on short-term debt, assuming additional risk to reduce their borrowing costs.

This debt, known as commercial paper, can have terms as short as a single night. It is a popular tool for many companies to cover accounts payable or pay for inventory.

Real-estate investment trusts tend not to have these expenses, but some property firms are amassing short-term obligations because they can borrow at cheaper rates than longer-term debt. Interest rates on commercial paper are generally a half percentage point lower than those on bank credit facilities, according to a new report from Fitch Ratings.

The risk, analysts say, is that property companies could be unable to refinance this debt if lenders suddenly lose confidence, for example in the event of a financial panic.

Because real estate can take time to sell and prices fluctuate, property owners faced with a sudden financing shortfall are sometimes forced into foreclosure -- one of the reasons most firms prefer long-term mortgages.

"It would be an unforced error if there were a hiccup in the commercial-paper availability," said Stephen Boyd, a senior director at Fitch. "Why take that risk?"

Mr. Boyd said more REITs are issuing short-term debt in part because the real-estate market cycle is nearing its end. "There are fewer levers to pull off earnings growth, and this is one of them," he said.

While commercial paper accounts for a mere fraction of overall real estate liabilities and the practice is not widespread, some prominent property companies are getting involved.

In the first half of this year, Ventas Inc., Welltower Inc. and Mid-America Apartment Communities Inc. issued commercial paper. Ventas's vice president of investor relations, Juan Sanabria, said commercial paper is "funding short term working capital needs and is not a mismatch to long duration assets."

Apartment owner Equity Residential has been issuing this type of debt since February 2015 and had $345 million outstanding at the end of the first quarter, according to its public filings. Chief Financial Officer Robert Garechana said the company decided to issue commercial paper because "it just was a cheaper alternative" to credit facilities.

It uses its $500-million program to cover short-term funding gaps, for example between the expiration of a mortgage and the issuance of new long-term debt, or between the purchase of one building and the sale of another.

Mr. Garechana said he fielded questions from bond investors about the risks of commercial paper, but most weren't concerned. He said the company has a $2 billion credit facility, and keeps $500 million unused in case it needs to end its commercial-paper program. "When you use it in a modest way like we do, I don't view it as being incrementally risky, " he said.

Mall owner Simon Property Group Inc. issued its first commercial paper in October 2014 under a program that allowed the company to borrow up to $500 million.

The company has since increased the program to $2 billion, and had $1.3 billion outstanding at the end of March, according to Fitch. The weighted average interest rate on its commercial paper was 2.58%, compared with 3.28% for its credit facilities, according to its public filings. Simon Property didn't respond to requests for comment.

In most cases, commercial paper accounts for less than 5% of debt. And property firms usually have credit facilities with banks that they could tap into if short-term debt is no longer available.

Still, the Fitch report called commercial paper issuance a "modest net credit-negative" for real-estate investment trusts. While the availability of credit facilities lessens the risk, the report notes, it doesn't eliminate it.

Using bank facilities to pay off commercial paper could mean less money is available to use elsewhere, and concerns over short-term debt could spill over into bond and mortgage markets, leading to higher debt costs there as well.

Write to Konrad Putzier at konrad.putzier@wsj.com

(END) Dow Jones Newswires

July 09, 2019 09:37 ET (13:37 GMT)

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