01/14/2011

After Surge, REITs Seen Easing Bond Issuance

REITs are expected to scale back issuance of unsecured bonds this year, after bringing a near-record volume of paper to market in 2010.

Thirty-two REITs floated $17.5 billion of bonds last year, nearly double the amount issued in 2009, according to Commercial Mortgage Alert's REIT-Bond Database. That was the second-highest annual volume, not far off the $18.5 billion record set in 2006.

Bank of America retained its crown as the top bookrunner of REIT bonds, leading $2.8 billion of transactions, for a 16.3% market share (see ranking on Page 10). Close on its heels was Citigroup, which led $2.5 billion of transactions, capturing a 14.2% market share. Rounding out the Top 5 were J.P. Morgan ($2.3 billion), Deutsche Bank ($2.1 billion) and Wells Fargo ($1.5 billion).

BofA also topped a separate ranking that gives full credit to all members of underwriting syndicates. The bank was lead or co-manager on $10.5 billion of deals, giving it a hand in 60.2% of the total volume. It edged out RBS ($10.4 billion) and Citi ($10.3 billion). Next came J.P. Morgan ($9.5 billion) and Deutsche ($9.1 billion).

Last year's activity was driven in part by pent-up demand following three years of below-average issuance, as well as by opportunistic offerings aimed at exploiting rock-bottom interest rates. For example, some REITs used the proceeds to pay off higher-rate bonds a year or two early.

But the explosion of issuance has exhausted some of the need for capital. What's more, interest rates have started to trend up, further depressing appetites. Indeed, offerings tapered off in November and December as rates started to rise.

REIT analyst Thierry Perrein of Wells thinks issuance this year will dip to the range of $14 billion to $16 billion. Several other industry pros offered similar forecasts.

Philip Kibel, Moody's team leader for REIT bond ratings, expects activity to be heavier in the first half because REITs needing capital will be motivated to float bonds before anticipated increases in interest rates. Likewise, issuers will want to take advantage of the ongoing bond rally while it's still strong, he added. The rally has been fueled in part by the influx of yield-hungry investors from other sectors of the corporate-bond market, where comparable paper has been trading at much higher prices.

U.S. REITs have $4.5 billion of unsecured paper and $3.1 billion of convertible debt coming due this year, according to Wells. Another $5.6 billion of REIT bonds and $6.2 billion of convertible paper are slated to mature next year.

REITs will likely cut back on tender offers to buy back longer-dated paper, because bondholders are no longer willing to sell them at the discounted levels that were common in 2009 and the first half of last year, Perrein said.

A big wild card of issuance is the degree to which REITs resume acquiring properties. If companies step up their purchases, their demand for capital would rise commensurately.

Two REITs likely to be active issuers this year are Equity Residential Properties and Simon Property. Equity Residential, a Chicago apartment REIT, has $1.05 billion of bonds and convertible debt maturing over the next two years. Simon, an Indianapolis mall REIT, has $773.5 million of that kind of debt coming due over the same period. Simon was by far the biggest issuer last year, selling $3.2 billion of paper, or 18% of overall issuance.

A few healthcare REITs are also expected to come to market. HCP has said it will issue about $1 billion of bonds in the first quarter to help fund its $6.1 billion acquisition of HCR ManorCare of Toledo, Ohio, which owns 338 nursing homes and assisted-living facilities. With the deal, HCP's portfolio will grow to more than 1,000 healthcare properties. The company, based in Long Beach, Calif., also owns about $2 billion of healthcare mortgages.

Meanwhile, word has it that Ventas Realty will float at least one more offering to help repay $1.6 billion of debt it will assume via its $3.1 billion takeover of Atria Senior Living of Louisville, Ky. Chicago-based Ventas floated $400 million of bonds in early November, just after signing the agreement to buy Atria, which owns 118 senior-housing communities in upscale areas of New York, New England and California. Ventas already owns 598 properties in 33 states.

Another healthcare company, Senior Housing Properties, became the first REIT to issue bonds this year, floating $250 million of paper on Monday (see article at left).

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