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CMA
October 14, 2016  

REIT-Bond Issuers Break Annual Record Early

It’s already a record year for REIT-bond issuance, mostly due to a flood of offerings from non-traditional issuers.

Led by cell-tower operators American Tower and Crown Castle International, 50 REITs floated $31.6 billion of fresh paper during the first ninth months of the year. That eclipsed the $31.4 billion tally for all of 2015, which was the fourth year in a row that issuance hit an all-time high, according to Commercial Mortgage Alert’s REIT-bond database.

J.P. Morgan and Bank of America are headed for a yearend showdown in the bookrunner ranking. J.P. Morgan was out in front as of Sept. 30, after leading $3.5 billion of REIT-bond issues since Jan. 1. But BofA was close on its heels with $3.2 billion of deals.

The overall rise in REIT-bond volume partly reflects long-running efforts by issuers to exploit rock-bottom rates on U.S. Treasurys, which serve as the benchmark for spreads on their offerings. The corporate-bond market in general has also rallied since the Brexit vote in late June sent the financial markets into a brief tailspin.

Still, “I don’t think the fourth quarter is going to be as busy as the second or third quarters,” said Moody’s analyst Philip Kibel, the agency’s team leader for REIT-bond ratings. “A lot of REITs that wanted to come to market have already done so,” he said, noting that some were eager to issue well ahead of potential market volatility stemming from the presidential election and an anticipated move by the Federal Reserve to raise interest rates in December.

Much of this year’s deluge of offerings can be chalked up to “specialty” REITs, including owners of cell towers, casinos, data centers and other properties whose cashflows hinge on operating businesses, said Wells Fargo analyst Thierry Perrein. Meanwhile, issuance has leveled off among “core” REITs in the major property sectors, who rely most heavily on rental income from their office buildings, apartment complexes, shopping centers and the like.

Of the top five issuers that floated bonds over the January-September stretch, all but one were so-called specialty REITs. The exception was office-property giant Boston Properties, which issued $2 billion of unsecured bonds. American Tower led the pack with $3.25 billion of offerings, followed by Crown Castle with $3.2 billion. The others in that group were casino operators MGM Growth Properties ($1.6 billion) and Gaming & Leisure ($1.4 billion).

“There has been a lot of growth and consolidations among the specialty REITs, and that’s what’s likely to keep driving the growth in bond issuance,” Perrein said. That’s disappointing to traditional buyers of REIT bonds, because “they don’t typically want to invest in operating businesses,” he added. “For them, it’s all about hard assets. They’re focused on property values and location, location, location.”

It’s difficult to project bond issuance by REITs because it depends heavily on their acquisitions of properties and other companies, which can be unpredictable. But mergers and acquisitions are generally less common among mature REITs in core property markets, which still make up the bulk of annual deal volume.

“There’s nothing on the horizon to promote significant growth among core REITs,” said Steven Marks, who heads up Fitch’s U.S. REIT group.

In recent years, persistently low rates have continuously prompted mainstream REITs to issue new paper so they could pay off maturing bonds ahead of schedule. But they have very little coming due in the next two years or so, because many REIT bonds have 10-year terms and the crash caused issuance to dry up in late 2007 through 2008, Marks said.

U.S. investment-grade REITs have only $375 million of maturing unsecured debt that needs to be paid off or refinanced before yearend, according to Wells. And the total for next year is just $10.5 billion, including $7 billion of bonds. The rest consists of term loans and convertible debt securities.

While Fitch doesn’t publish volume predictions, Marks said the rating agency estimated at midyear that 2016 issuance would ultimately hit $35 billion. Fitch is sticking with that broad projection for now, up from its original guess of about $30 billion in January.

For his part, Perrein has revised his annual REIT-bond volume forecast three times this year — trimming it twice and then increasing it in late August in response to shifting market conditions. Looking only at public, investment-grade paper from core issuers, he’s calling for a yearend total between $20 billion and $22 billion, up from the actual week-ago issuance tally of $19 billion. His original forecast for this year was $25 billion to $27 billion.

At the three-quarter mark, J.P. Morgan led the bookrunner ranking with an 11% market share, while BofA took a 10% slice of the business. Wells was in third place ($2.6 billion, 8.3%), followed by Morgan Stanley ($2.5 billion, 7.8%) and Barclays ($2.4 billion, 7.7%). BofA led the field in full-year 2015, ending a three-year reign by J.P. Morgan.

BofA led a separate ranking that gives full credit to all members of underwriting syndicates. It served as lead- or co-manager on $24.9 billion of issues, taking a hand in 78.8% of REIT-bond issuance as of Sept. 30. Next up was J.P. Morgan (74.7%), followed by Wells (66.3%), Barclays (64%) and Morgan Stanley (63.2%).