NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) has issued a new report, “A Deeper Dive on REIT Bond Leverage – AAA in Disguise?”. The report makes the following key points:
- REIT bond leverage, measured by KBRA as unsecured debt/unencumbered asset value, is well below levels suggested by other generally accepted REIT credit metrics, and a fraction of the look-through leverage commonly found in AAA-rated conduit CMBS and Freddie Mac K-Series securities.
- Mark-to-market of unencumbered assets reveals a far broader spectrum of REIT bond leverage than suggested by commonly used REIT leverage metrics.
- Our research finds that the oft-used Debt/EBITDA ratio provides a sub-optimal measure of REIT leverage, implicitly rewarding riskier higher-yielding assets and failing to differentiate between companies of disparate property type and asset quality.
- REIT bond issuers have little incentive to lever up, given the equity outperformance of lower-leveraged REITs, the greater flexibility of unsecured debt, and for most REITs lower borrowing costs in the bond versus the mortgage market. The post-2009 alignment of equity and bondholder interests in maintaining lower leverage suggests that corporate finance theories are working in REITs’ favor—lower leverage is being rewarded with higher trading multiples.
To read the full report, please click here.
About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).