As margins in the high-yield universe continue to shrink, bankers are trying to expand their relationships with Real Estate Investment Trusts.
"Every conceivable lending technique will find its way into servicing the REIT industry," said Daniel Alpert, managing director and principal at Westwood Capital, a New York investment bank that specializes in real estate.
"Over the last 18 months, some of the newer REITS are gaining maturity," said Michael Corbett, a director in real estate syndications at BancBoston Securities Inc. "With their size, market capitalization, and conservative balance sheets, they've demonstrated their ability to borrow on an unsecured basis."
The eagerness of banks to serve REITs marks a significant change in the way these investment vehicles are viewed. Banks are regaining their appetite for real estate in general, and they say the trusts are structured differently than they were in the 1970s, when REIT failures created big problems for banks. Indeed, REITs have become a big competitor for investor dollars on Wall Street. (See article on page 25.)
The current competition for REIT relationships also reflects the heated contest between banks and investment banks to provide one-stop shopping to an ever-widening array of industries.
Kevin Comer, a senior real estate securities analyst at Bankers Trust New York Corp., noted that REIT loans are becoming more like traditional commercial and industrial loans.
And he argued the REITs are just as attractive a client base for banks as any other industry. "Over the last six years, as the REIT industry has matured, lenders and investors are recognizing that this REIT industry is more solid than in prior generations," he said.
In the early 1990s, REITs were financed through structured and secured offerings, based on the size of their assets.
As REITs have achieved investment-grade status in the eyes of the rating agencies, they have sought broader access to the capital markets, and more flexible borrowing arrangements.
In 1996, REITs raised $5 billion in unsecured debt, and issued a record 131 secondary equity offerings, according to the National Association of Real Estate Investment Trusts.
J.P. Morgan & Co., Chase Manhattan Corp., NationsBank, BankBoston Corp., and Union Bank of Switzerland led the list of agents leading REIT loans, according to Loan Pricing Corp.
Now many banks and investment banks have taken the "soup-to-nuts" approach to raising cash for their corporate customers, creating more financing options for the REITs.
Mr. Alpert of Westwood noted banks have been offering intermediate-term financing through investment banking subsidiaries.
In one recent trend, Mr. Comer said, investment banks have been arranging "spot" equity offerings for REITS. The offerings can be closed in a matter of days, and carry low fees of 1% to 3% of the offering amount, as opposed to broadly marketed secondary offerings, on which fees are as high as 7%.
Indeed, in a reversal from a few years ago, it has become a borrower's market for the trusts.
"Traditionally, lenders could sit back and wait for (REITs) to approach them. Now, both lenders and investment bankers are in the same position-of having to convince the companies to come to them," Mr. Comer said, adding that "The competitive bid environment stretches across both debt and equity."
"There's no doubt about it that the margins have thinned and it's become much more competitive," said analyst Chris Haley of Wheat First Butcher Singer. "Its a great time to be a borrower as a real estate company."
Bankers say that a BBB-rated company that borrowed at 150 to 200 basis points over the London interbank offered rate in 1995 may be able to get a revolving credit facility for less than Libor plus 100 basis points today, putting lending to the REIT industry more on par with other industries.
But bankers continue to express confidence that the prices are adequate to cover the risk of real estate-related lending.
"Pricing has come down dramatically, but the covenant packages and underwriting standards have held up pretty well," said Jon Zehner, a managing director at J.P. Morgan Securities.
Analyst Richard Moore of Goldman Sachs agreed. "Clearly this is a rapidly growing sector, and it is still more profitable than other kinds of lending. The loans make strong quality assets for the bank."