Publicly-traded real estate firms have in recent years taken on cheaper, riskier debt in an effort to offset borrowing costs.
The debt, known as commercial paper, has become increasingly popular for firms looking to settle accounts or inventory payments, according to the Wall Street Journal. But the cheap debt, which is around a half-point cheaper than bank credit facilities, could leave REITs unable to refinance if investors lose confidence suddenly.
While commercial paper makes up for a minimal portion of a most companies debt portfolios, “It would be an unforced error” for firms that are increasingly reliant on it, if the debt became unavailable suddenly, Stephen Boyd, a senior director at ratings agency Fitch, told the Journal.
Its popularity has grown as real estate firms reportedly recognize the market’s cycle is slowing.
Simon Property Group, the publicly traded mall owner, first took on commercial paper in 2014, and was limited to issue up to $500 million. That figure has since increased to $2 billion, and at the end of the first quarter this year, it had $1.3 billion outstanding.
Another firm, apartment landlord Equity Residential has reportedly issued commercial paper since 2015 and had $345 million outstanding at the end of the first quarter this year. [WSJ] — David Jeans