Why debt leverage matters
Residential REITs have undertaken several development and reconstruction activities to maintain leadership in the industry. They have remodeled properties in order to offer premium rentals. REITs fund their working capital mainly through equity and debt. However, too much dependency on debt could result in the liquidation of the company and also raise its interest costs. Thus, it’s very important for REITs to optimally leverage their balance sheet in order to function properly. Let’s have a look at the debt condition of the residential REITs.
AvalonBay Communities (AVB) has a debt-to-equity ratio of 0.68x in 2Q17. Its net-debt-to-core EBITDA for 2Q17 was pegged at 5x. It incurred an interest expense of $50.1 million during the quarter. The interest coverage stood at 6.7x for the period. As of 2Q17, AvalonBay had $293.2 million of cash in hand.
On the other hand, Equity Residential (EQR) had a debt-to-equity ratio of 0.87x. EQR ended the quarter with cash and cash equivalents of $37.7 million. Its total outstanding revolving credit and secured debt balance stood at $900 million as of 2Q17.
Essex Property (ESS) had a debt-to-equity ratio of 0.90x. As of 2Q17, ESS had $1.0 billion in unsecured credit facilities to draw on.
Refinancing to improve balance sheet
EQR plans to pay its outstanding commercial paper and revolver balance. It will fund the repayment through the proceeding of another loan with a longer maturity period and a lower rate of interest. EQR further raised the midpoint for its debt offering to $500 million from the $400 million expected previously, as it expects a better balance sheet position for the year.
AVB reduced its weighted average interest rate by 150 basis points and maturity period to ten years during the quarter with the help of refinancing activities. AvalonBay was able to raise $1.5 billion of external capital in 2017. The company further plans to procure an additional $400 million throughout fiscal 2017.
ESS refinanced $350.0 million of a ten-year senior unsecured note bearing an interest rate of 3.6% per year. Further, it repaid two mortgages with an effective interest rate of 4.9%.
ESS also repaid $40.0 million in private bonds with an effective interest rate of 4.6%. No debts are scheduled to mature in 2017.