REIT Joint Ventures and Funds: Weighing the Pluses and Minuses

Abstract

Real estate investment trusts (REITs) are increasing their use of joint ventures and funds to finance real estate purchases and development pipelines, and diversify their revenues with additional advisory and management fees. All things being equal, Moody's views diversification as a positive credit characteristic. These joint ventures and funds may be more leveraged than a REIT's wholly owned assets, but off-balance sheet, achieving a reported (if not actual) balance sheet condition, and complicating an analysis of the true credit implications. A select group of REITs have been successfully using these structures for some time, which has provided them with revenue and funding diversification. However, as these structures are a rising trend among more REIT's, on a broad basis the related fees show a degree of historical variability, some of which may be due to the current high growth rate and early stage development for most firms. This variability is higher for acquisition, disposition and promote/success fees, but less so for property management and leasing fees. This Special Comment provides background on REITs' JV and fund structures, and outlines Moody's views of their credit implications. In addition, Moody's has historically taken a significant haircut on JV/fund income in our analysis. In this comment we expand on our quantitative and qualitative approach to these structures as first presented in Rating Methodology for REITs and Other Commercial Property Firms.