REIT’s May Need To Cut Distributions To Conserve Cash

Canadian Real Estate Investment Trusts will start looking closely at their ability to payback mortgages and convertible debentures as they come due.

In a normal credit environment, Real Estate Investment Trusts are able to renew mortgages and go to the capital markets to roll over convertible debentures if their stock price is low. Today, many REIT’s have convertible debentures coming due between 2010 – 2014 as well as mortgage renewals that may not be available at favourable rates.

Ideally, free cash flow would be used to buyback debentures trading at significant discounts to help their balance sheets. However, cutting distributions will have a short term negative impact on their share prices.

Expect REIT’s to start selling off assets as they try and strengthen their balance sheet and survive as mortgage renewals and debentures come due which could place lower valuations on commercial property as supply increases.

Your thoughts on REIT’s and commercial real estate are greatly appreciated.

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