Real estate investment trusts (REITs) will be able to avoid bankruptcy because their cashflows are strong enough to get them through the cycle, according to Chicago-based investment manager Brookfield Redding.
The current share prices of many REITs suggest they face bankruptcy.
But although the net asset value (NAV) of properties have dropped over the last 18 months, most REITs still have strong cashflows as they continue to receive rents from long-term contracts.
The entire Australian REIT sector generates 2.5 times the cash it needs to service its total debt, Brookfield Redding chief executive Kim Redding said yesterday at an AMP Capital Investors briefing.
"The NAV is fluctuating up and down ... but all along the company is generating three times the cash from the properties to service that allied debt," Redding said.
"From a cashflow point of view these companies are in fine shape."
Theoretically, share prices should not reflect distressed situations, he said.
But a combination of uncertainty about lenders' intentions and a financing system that relies on short-term debt has forced prices down.
"My suspicion of what will happen is what has happened in Centro's case - the lenders will say we are not going to foreclose on you, but it's good to raise interest rates a couple of hundred basis points," Redding said.
"They will extract additional earnings from companies in exchange for extending the [loan] term."
Brookfield Redding's partnership with AMP Capital Investors, AMP Capital Redding Investors, manages $3.9 billion in global real estate assets.
