REITs at Risk for 'Correction' in Real Estate Markets.(Real Estate Investment Trust )

New York -- Some U.S. real estate investment trusts and real estate operating companies could face challenges if a correction were to happen in the "frothy" real estate investment and capital market areas, according to Moody's Investors Service.

Overall, the rating outlook for REITs and REOCs remains stable for 2005 and into 2006 as they sustain their moderate debt levels, stable-to-improving interest coverage, and sound liquidity - and as most commercial real estate property types continue to see their performance improve - the rating agency said.

"The top questions facing the industry are whether commercial real estate has peaked as regards to cap rates, and whether REIT stock prices and debt finance terms turn more hostile," notes Philip M. Kibel, a Moody's senior vice president and author of the report.

REITs and REOCs performed well during the recent economic downturn, thanks to low interest rates and "strengthening" capitalization rates on property sales, according to the rating agency.

As well, the "welcoming" capital markets and robust REIT stock performances of the 2001-2004 period helped REITs turn in a good showing.

The rating agency believes that REIT managements are to be credited for much of the good performance since they took measures to "refocus their growth strategies, sell non-core and underperforming assets, and reduce their development pipelines once they realized a recession was underway in 2001."

At the same time, "the moderate leverage and healthy levels of unencumbered assets that earmark many REITs were also of help" from a credit rating perspective.