Ms. Frankel: In the period between January 1, 2008 and April 30, 2009, Moody's REIT team made 40 rating changes - 38 downgrades and two upgrades for an upgrade/downgrade ratio of 5.3%. The good part is that of the downgrades, only four involved "fallen angels" - issuers that moved from investment grade to speculative - and all but one of the 15 multi-notch downgrades involved speculative grade issuers (i.e., below investment grade or Ba and below). There were 26 total outlook and rating review changes; 18 were directionally negative - 12 to negative from stable, and six to stable from positive. Three outlook changes were directionally positive. The remaining outlook changes were uncertain or directionally neutral in nature. Since the beginning of 2008, 47 issuers out of the total Moody's-rated REIT and REOC universe of 73 (or 64%) have maintained their same rating and outlook. We do expect most rating actions among US REITs to be negative in the coming year, as they face refinancing needs at a time of restricted cash flows and rising capitalization rates due to the economic recession. However, many REITs have managed their capital structure and operations during the recession and are likely going to retain their ratings. Investment-grade REITs entered this period of reduced credit with sound balance sheets and largely unencumbered portfolios of assets, which has been a great help in successfully raising capital in the debt and equity markets to lower refinancing risk and augment liquidity. In some cases, increases in total leverage and secured debt levels have added substantial pressure on ratings and thus caused downgrades. This has also impacted bond and credit facility/line covenants. The bottom line: One, the upheaval in the credit markets showed that a capital structure based upon access to all four quadrants of the markets - debt, equity, public, private - is important. Two, is a back-to-basics attitude among REIT management - internal management, focusing on "internal growth," i.e., leasing and maximizing property values.
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