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Retail REITs pursue cash-out financing

The lockdown in the commercial mortgage-backed securities market and its chilling effect is forcing retail estate investment trusts and landlords to look for innovative financing. Frequently, owners are using their portfolios like ATM machines to strengthen balance sheets and fund growth.

Case in point: Indianapolis-based Simon Property Group recently bundled six assets with low loan-to-value ratios — roughly 30% debt to 70% equity — and essentially put a second mortgage on the properties to secure $700 million from 14 banks. Simon plans to use the proceeds to help fund about $2.2 billion in new development, expansions and maturing debt in 2008.

Simon CFO Stephen Sterrett, who discussed the strategy at Credit Suisse Group's Global Real Estate Conference in early April, remarked that in an ideal world the REIT would have refinanced the properties in the CMBS market when the first mortgages matured. “That is not the world we are in right now,” he added, “so we're being challenged to find financing in more creative ways.”

Macerich Co. in Santa Monica, Calif., which owns some 76 million sq. ft. of shopping centers and regional malls in the U.S., anticipates receiving up to $500 million in proceeds when it refinances several assets this year, including Broadway Plaza in Walnut Creek, Calif. It plans to leverage debt up to 55% or 60% of the mall values, according to comments made by Macerich executives during a fourth-quarter earnings call.

Meanwhile, Chicago mall owner General Growth Properties (GGP) mortgaged six properties in the first quarter, including two previously unencumbered by debt, that netted $658 million in proceeds. The REIT also sold nearly 23 million shares for $36 each, a discount of 7%, to raise $822 million.

The company is using the funds to finance its purchase of The Shoppes at Palazzo in Las Vegas, pay joint-venture partners and repay $2.6 billion in debt maturing this year. The stock sale effectively reduced General Growth's net asset value to $56 a share, a reduction of $4 per share, suggested Stifel Nicolaus analyst David Frick. “We would have preferred that [GGP] bridge this period without issuing equity at 47% off its share price highs of last year, but we conclude that management gritted its teeth and took the dilution because it had to do so,” wrote Frick in a research note.

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