Thursday, July 07, 2011

No Pressure - Industrial Income's Line of Credit Requirement

Most non-traded REITs obtain a line of credit to help facilitate acquisitions and other activities.  The lines of credit come with plenty of restrictions and covenants, and are complex financial instruments.  These restrictions and covenants vary per line of credit, and may include limits on a REIT's leverage, require certain minimum debt coverage ratios, and place conditions on a REIT's distributions.  Yesterday, I read (in a filing) a new requirement as part of Dividend Capital's Industrial Income Trust's new $40 million line of credit.  The lenders are requiring Industrial Income, starting for the period ending September 30, 2011, to raise equity of $60 million a quarter (or $20 million a month).  Here is the language from Industrial Income's July 1, 2011, Post Effective Amendment No 5:
The Revolving Credit Agreement requires that as of the end of each month, commencing with September 30, 2011, we must have generated gross proceeds from the Equity Offering equal to an aggregate amount of at least $60.0 million during the previous three full calendar months, which we refer to herein as the “Minimum Equity Raise Requirement.” If we fail to meet the Minimum Equity Raise Requirement, 100% of the net proceeds of our Equity Offering must be applied to reduce amounts outstanding under the Revolving Credit Agreement until we are able to meet the Minimum Equity Raise Requirement. In addition, if we fail to generate at least $30.0 million in gross proceeds during the previous three full calendar months, the Borrower may not draw any amounts under the Revolving Credit Agreement until such condition has been satisfied.
Industrial Income raised over $100 million in the first quarter of 2011, so the requirement does not seem to pose a current concern.  I don't have a problem with this restriction, and mention it because I have not seen this requirement before.  I think it is a smart move by the bankers.  Industrial Income is lucky that the lenders did not require the REIT to do something audacious, like pay even a portion of its distribution from operating cash flows (read page S-2 of the July 1, 2011, Post Effective Amendment No 5).


Anonymous said...

Just wondering If IIT doesn't meet this requirment, what does it mean to folks invested in its reit

Rational Realist said...

Don't want to speculate. Equity just needs to be applied to the line of credit. IIT's current monthly equity raise puts it on pace to double the required amount.