NEW YORK - Moody's Investors Service gave a negative rating to U.S. REITs in its annual report on the sector, which the rating agency released last week. The rating reflects many companies' increased appetite for risk in the face of a peaking real estate cycle and volatile capital markets, according to Jay Siegel, vice president at Moody's and principal author of the report.
The predominant model from the mid-1990s of funding growth through a mix of public unsecured debt and common stock issued at a premium to net asset value is on hold at many REITs, and has become increasingly difficult for the rest, he wrote. The REITs that are increasing leverage as a solution to their growth problems are most likely to come under rating pressure, according to the report.
REITs pursuing alternative, more prudent ways to raise capital, such as selling selected non-core assets, using moderately leveraged joint ventures and introducing new revenue generating services are better positioned for upgrades, he wrote.