investment trusts because of increased leverage and risk, reduced financial flexibility, and peaking property markets.

Though it does not expect widespread downgradings, the New York rating agency said in a recent report that it expects more downgradings than upgradings. Most of the REITs that Moody's tracks have ratings of Baa, the low end of the investment-grade range.

Usually, Moody's said, REITs fund their growth with a mix of public unsecured debt and common stock issued at a premium to net asset value. But most are no longer trading at a premium; average prices have fallen 28% since January 1998.

With the equity market less receptive, many REITs are increasing their leverage, and some are increasing their use of secured debt, which Moody's finds particularly troublesome. "Encumbering balance sheets decreases long-term financial and strategic flexibility and subordinates unsecured bondholders and preferred shareholders," wrote Jay Siegel, a Moody's analyst.

Limited access to the public markets has also led many REITs to rely on their bank lines to fund growth. REITs not only are drawing on their lines more but also are drawing up to their limits, in some cases. Though normally an REIT would use its credit lines to buy properties and then raise equity or long-term debt to repay the bank, "there is less assurance today that REITs will be able to successfully refinance their bank loans in this manner at appealing prices," the Moody's report said.

"The key in looking at individual credits is: How are they reacting?" Mr. Siegel said in an interview. "Are they maintaining flexibility by keeping their assets unencumbered? If they're incurring additional debt, are they doing so in moderation? Are they generating growth without increasing leverage?

"For REITs that are reacting in those ways, we don't foresee ratings pressure. For REITs that are responding in a way that puts debtholders in the back seat, we will see pressure."

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