07/13/2012

REIT-Bond Deluge Expected to Taper Off

Corporate-bond issuance by REITs is expected to fall off sharply for the rest of this year, following the busiest first half ever.

Twenty REITs floated almost $10 billion of unsecured bonds during the January-June stretch. That volume surpassed the previous first-half record of $9.6 billion set last year. And it was nearly the most prolific issuance half of all-time, trailing by just $75 million the volume in the second half of 2006, according to Commercial Mortgage Alert’s REIT-bond database.

The breakneck pace set by issuers over the past six months would seem to indicate that annual issuance could easily blow past the $18.5 billion full-year record set in 2006.

However, industry professionals have barely adjusted their earlier forecasts for 2012 issuance, noting that most issuers have already tapped the market heavily enough to satisfy their near-term funding needs. Some aren’t even convinced that 2012 volume will surpass last year’s $14.3 billion of issuance.

For example, Philip Kibel of Moody’s still believes the yearend total will come in just under $13 billion, as he predicted in January. And Wells Fargo analyst Thierry Perrein is sticking with a forecast of $12 billion to $14 billion that he floated three months ago, up from his original projection of $10 billion to $12 billion at the start of this year.

Fitch didn’t make an earlier prediction, but it’s now calling for about $15 billion of REIT bonds to price this year, said Steven Marks, head of the rating agency’s U.S. REITs group. “I don’t think the pace we’ve seen so far this year is sustainable because a lot of issuers have taken advantage of historically low [interest] rates by coming to market already,” Marks said.

“The interest-rate environment for REIT-bond issuers is still extremely attractive, but they are still going to need some sort of catalyst to bring them to market,” said Kibel, Moody’s team leader for REIT bond ratings.

The upshot is that REITs have little reason to raise more debt unless they need to fund significant purchases of properties or other companies, Perrein said. But the pace of such acquisitions has slowed lately. “Nobody is buying,” he said. “There’s a lot of dry powder, but they’re not doing anything.”

Apartment REITs might turn out to be an exception, since their development pipelines are currently more advanced compared to REITs in other property sectors. That could lead to multi-family REITs issuing more bonds to fund construction projects, although none have issued debt specifically for that purpose yet. Those most likely to roll out second-half offerings include AvalonBay Communities of Arlington, Va., BRE Properties of San Francisco, Camden Property of Houston and Equity Residential of Chicago.

To be sure, REITs in general will keep trying to exploit opportunities to buy commercial properties tied to distressed debt, according to a Fitch report. But that won’t necessarily lead to an immediate rise in REIT-bond issuance, partly because they currently prefer raising capital in the form of bank loans over corporate-bond offerings. That trend took root about a year ago, as REITs found it cheaper to borrow from banks via term loans or revolving credit facilities. The average cost of going that route is currently about 150 bp less than floating unsecured bonds.

REITs will also strive to continue boosting the size and quality of their property holdings without increasing their ratios of debt to equity, Fitch said. Since early last year, they have mostly funded mergers, acquisitions and property purchases with roughly equal issuance of stock and unsecured debt.

“If there are M&A opportunities, we expect them to be on a leverage-neutral basis,” Marks added. “There’s a recognition among the REITs that too much leverage can increase perceptions of default risk,” which could push down stock prices and drive up borrowing costs.

As for issuing corporate bonds to pay off maturing debt, that has become a low priority for U.S. investment-grade REITs. They have just $4.1 billion of unsecured debt coming due by yearend and another $8.8 billion in 2013 — including corporate bonds, convertible notes and term loans, Perrein said.

Topping the list of REITs with debt maturing soon are Equity Residential and retail operator Kimco Realty of New Hyde Park, N.Y. Kimco is considered likely to float unsecured bonds before yearend.

Meanwhile, J.P. Morgan has emerged as the top bookrunner of REIT bonds so far this year, leading $1.7 billion of deals to capture a 17% market share. The underwriter finished second in the 2011 yearend ranking to Bank of America, which has won the annual bookrunners’ derby for three years in a row.

At midyear, UBS was second among REIT-bond bookrunners, with $1.22 billion of lead-underwriting mandates, for a 12.2% slice of the market. It was closely followed by BofA with $1.16 billion of assignments (11.7%), Citigroup with $959 million (10%) and Barclays with $875 million (9%).

J.P. Morgan also topped a first-half league table that gives full credit to all members of underwriting syndicates. It served as lead or co-manager on $8 billion of deals, giving the bank a hand in 81% of issuance. Rounding out the top five were RBS ($7.3 billion), RBC Capital ($6.1 billion), Barclays ($5.9 billion) and BofA ($5.8 billion).

Simon Property was the top issuer in the first half, with $1.75 billion of bonds, followed by Ventas Realty ($1.2 billion) and Boston Properties ($1 billion).

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