This article is republished with permission from REITCafe.
This year, real estate investment trusts (REITs) have raised $17.1 billion of capital through the sale of unsecured notes, bringing the total raised over the past two and a half years to just more than $75 billion. That is more than they raised during the previous five years.
The massive volume should not be a surprise since it comes while the yield from ten-year Treasury bonds—the benchmark against which most REITs price their bonds—has ranged from 1.66 percent to 3.04 percent during the past 30 months.
The low risk-free rates have allowed REITs to issue ten-year bonds with coupons as low as 2.75 percent during that period. That was done by Federal Realty Investment Trust, which has a Baa1 rating from Moody’s Investors Service and A- ratings from Standard & Poor’s and Fitch Ratings.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 149 | 150 | 153 | 138.5 | 170 |
| Multifamilty | 145 | 146 | 148 | 139.8 | 166.7 |
| Office | 155 | 152 | 155 | 148 | 175 |
| Retail | 150 | 152 | 154 | 139.8 | 175 |
| Average Spread | 149.75 | 150.00 | 152.5 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.47 | 2.27 | 2.12 | 2.17 | 3.04 |
Given issuance so far, volume this year could very well exceed the $30.6 billion annual record set last year. But that hinges on interest rates remaining low and whether REITs have a need to continue coming to market.
Most REITs carry ratings of BBB or BBB+ and have been able to issue ten-year bonds with coupons of 4.25 percent or less during that period.
A total of 63 REITs have issued bonds during the past 30 months. That is nearly 30 percent of the 221-company universe represented in the FTSE NAREIT index. That means the market is not open to everyone. Most should have investment-grade ratings—all but a few that have issued public bonds have had such ratings. As such, their overall leverage levels should be relatively low.
Most REITs have taken advantage of favorable bond-market conditions in order to refinance existing debt, lowering their debt-service obligations. But some have tapped the market in order to fund acquisitions.
Having the ability to tap the unsecured market gives REITs added financing flexibility. When market conditions are healthy—like they generally have been over the past 30 months—they can relatively quickly raise debt through the issuance of notes, which they can use to pay off mortgages on their existing properties, providing them with added financial flexibility to sell or refinance.
It typically takes about a week from when a company decides to issue in the bond market to when it actually gets funding. In contrast, it could take several weeks, or months, to lock in a mortgage on an individual property.
The most prolific issuers have included Prologis Inc. (PLD), which has raised $5.9 billion through eight issues over the past 30 months; Simon Property Group (SPG), with $3.5 billion through five transactions; and HCP Inc. (HCP), with $2.5 billion through four deals.
Prologis most recently raised roughly $750 million through a six-year bond offering it floated in Europe that carried a 1.375 percent coupon. The Denver industrial specialist allocated proceeds to pay down amounts it had outstanding under a credit line and to help fund its pending acquisition of 322 industrial properties with 3.6 million square feet (334,000 sq m) from KTR Capital Partners. It is forming a venture with Norges Bank Investment Management on that deal, which is valued at $5.9 billion, including the assumption of some $700 million of debt.
HCP, meanwhile, last month floated $750 million of ten-year bonds with a coupon of 4 percent. It used proceeds to fund its $161 million purchase of Philadelphia’s 833 Chestnut Street, a 705,000-square-foot (65,500 sq m) office building and data center in Philadelphia. The price it paid reflects a 5.78 percent capitalization rate, so it was able to generate positive leverage, bolstering its potential yield, with its bond issue. It also teamed up with Brookdale Senior Living Inc. to buy a portfolio of seniors’ housing properties for $849 million, reflecting a 6.6 percent cap rate.
As property prices have escalated—they are now 10 percent higher than the prerecession peaks reached in November 2007—REITs have faced challenges in finding suitable acquisition targets. In fact, some REITs are saying they are likely to become sellers, as opposed to buyers, because property values are so high. That could very well temper their need to borrow through the unsecured debt market.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 6/26/2015.
