REITs have been disproportionately hit by the credit woes. Loans to finance leveraged buyouts stopped abruptly, removing a positive catalyst for the REIT market (REITs had been a prime target of private equity investors). In addition, the credit crunch increased the possibility of a U.S. economic recession, fueling worries over underlying fundamentals for real estate.

(As a point of clarifcation, this article applies only to publicly traded equity REITs, unless specifically noted otherwise.)

While liquidity issues are not of any immediate concern, Fitch Ratings in a special report issued this month views the sector more cautiously as the real estate debt capital markets, specifically unsecured debt and CMBS, remains gripped by uncertainty and inactivity.

"Liquidity is still adequate for many equity REITs as sources of liquidity, less primary uses of liquidity, are still generating a surplus even as the capital markets have remained inhospitable to virtually all issuers," said Steven Marks, managing director and U.S. REIT group head for Fitch. "However, sustained contraction in liquidity in these markets, combined with unattractive costs to issuers, will likely continue to have consequences for REITs' ability to access capital."

Liquidity is an important credit consideration for equity REITs since such companies must pay out at least 90% of their taxable income in the form of dividends to their shareholders. Therefore, equity REITs are typically reliant upon availability of their primary sources of liquidity: revolving credit facilities, cash retained after dividend payments and unencumbered assets.

However, most equity REITs must also access the capital markets to make acquisitions, refinance debt maturities and fund larger capital expenditure programs, as primary liquidity sources are typically insufficient to meet these cash needs.

Net proceeds from real estate asset sales also provide a secondary and less reliable source of liquidity to REITs.

Since credit markets have tightened in the last seven months, REITs have dropped their buckets in every well available to them.

General Growth Properties Inc. (NYSE: GGP) during the first quarter of 2008 raised approximately $822 million of common equity and $1.3 billion of mortgage debt, the majority of which was used to repay indebtedness.

A chunk of the money raised in the stock sale though came from General Growth's chairman and CEO. MB Capital Partners III, an affiliate of Matthew Bucksbaum, General Growth's chairman emeritus, and John Bucksbaum, chairman and CEO, purchased $88 million of the common offering.

Most of General Growth's near-term debt maturities consist of mortgage debt, and despite the CMBS market slowdown, life insurance companies and other lenders remain active in providing financing for higher quality assets such as those owned by GGP, according to Fitch. Any pullback on the part of these lenders would likely result in GGP seeking to raise capital via asset sales, joint ventures or other forms of non-public capital, such as a preferred stock private placement.

Large REITs such as Boston Properties Inc. (NYSE: BXP) and Vornado Realty Trust (NYSE: VNO) remain well positioned to weather continued stress in the financial markets, Fitch reported.

Vornado was one of the first to market when the capital markets hit a wall in August 2007. Anticipating that capital markets would close, Vornado arranged a new, fully committed bank revolving credit facility of $1.6 billion, augmenting its existing $1 billion facility. These facilities, which have five-year and four-year terms, are priced at LIBOR plus 55 basis points and on which Vornado pays a 15 basis point annual fee. So far it has not tapped into its facilities.

Vornado in its annual report issued this spring said capital markets have continued to deteriorate but said it has access to capital, even in these "impossible markets." So far this year it has raised $1.35 billion, the majority of which came in the form of construction loans.

In addition, it has financed/refinanced three properties for $745 million, realizing net proceeds of $562 million, which increased its cash balances - "yet more dry powder," as the company put it.

Vornado also said it has adopted a "rigorous financial discipline" that any discretionary capital expenditures must have a source of financing -- "as opposed to drawing down our now difficult to replenish cash."

In other examples, Maguire Properties (NYSE: MPG), a Southern California-focused REIT that put itself up for sale but could not find a buyer, said last month that it would continue to focus on non-sale options to enhance liquidity, including reviewing its dividend policy.

Hines Real Estate Investment Trust, which is currently raising funds in an ongoing offering, noted this week that debt capital has become more expensive and less available. The non-traded REIT said it expects to continue to experience, delays between raising capital and acquiring real estate investments.

Prime Group Realty Trust, a Chicago-based REIT, has been selling assets and refinancing properties this year. It sold 12 floors of 330 N. Wabash Avenue to a hotel developer on March 18 and simultaneously refinanced the remaining portion of the property. The refinancing was arranged with ING USA Annuity and Life Insurance Co. and General Electric Capital Corp.

Several REITs have notable liquidity shortfalls, according to Fitch Ratings, which commented on those companies specifically.

HCP Inc. (NYSE: HCP) has taken significant steps since Dec. 31 to raise capital and delever its balance sheet. The company announced the planned sale of a hospital portfolio for proceeds of approximately $371 million to Medical Properties Trust, and recently completed two equity issuances that generated net proceeds of approximately $560 million. HCP remains on track to complete its delevering plan by the end of July 2008.

Apartment Investment and Management Co. (NYSE: AIV) is currently marketing for sale up to $1.5 billion of assets, executing on its decision to exit non-core markets. Asset sales should provide additional liquidity, although a portion of the net sales proceeds could be reinvested into acquisitions and redevelopment.

Simon Property Group Inc. (NYSE: SPG) remains in a solid position to raise capital to address its funding needs over the next two years. Simon maintains a large pool of unencumbered assets that could be utilized to secure additional mortgage commitments. As of Dec. 31, 2007, this pool included approximately 150 assets that had a gross book value of more than $17 billion.