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CMA
March 01, 2019  

Buyers Gorge on REIT-Bond Issuing Spree

Five REITs floated a whopping $1.8 billion of bonds this week, taking advantage of a recent surge in demand for investment-grade corporate paper in general.

All the offerings were rated in the mid-to-high triple-B range. They included $454.6 million of so-called green bonds that Digital Realty sold in Europe. The other transactions, all placed in the U.S., were two $350 million issues, from Highwoods Properties and Store Capital, and two of $300 million each, from Mid-America Apartments and Regency Centers.

On all four U.S. issues, strong demand forced investors to accept spreads that were 20-25 bp lower than the initial guidance circulated by dealers.

Regency’s 30-year bonds, with a 4.65% coupon, were priced to yield 4.671% and pegged to a spread of 165 bp over U.S. Treasurys. The other deals consisted of 10-year paper. Highwood’s offering of 4.2% notes were priced to yield 4.234% with a 160-bp spread. Store Capital’s 4.625% paper achieved corresponding levels of 4.718% and 205 bp. And Mid-America’s 3.95% bonds went out the door with a 3.984% yield and a 135 bp spread.

Industry pros chalked up the strong demand to a broader rally in investment-grade corporate bonds. “The credit market has certainly stabilized a bit,” said Ana Lai, head of the REIT-bond rating group at S&P, adding that the favorable climate creates opportunities for issuers who were forced to the sidelines late last year during a huge selloff in the financial markets.

The latest rally stems partly from the Federal Reserve’s Jan. 30 announcement that it probably won’t continue raising short-term interest rates this year. That has prompted some REITs to tap the market opportunistically in order to refinance outstanding bonds and loans with longer-term debt, market pros said.

“We’re at a point where borrowing costs are a lot cheaper than people had expected going into this year, so that has motivated some REITs to term out or pre-fund what they could,” said Chris Wimmer, who oversees REIT-bond ratings at Morningstar.

The average spread on REIT bonds tracked by the Morningstar Corporate Bond Index was 121 bp as of Wednesday, down from 147 bp at yearend. For a REIT issuing $300 million of 10-year paper, that would translate into an average interest-rate savings of about $8 million over the life of the bonds, Wimmer noted.

This week’s issuance by Digital Realty encompassed two “tap issues,” one denominated in euros and the other in British pounds. The San Francisco data-center REIT sold €225 million ($255 million) of seven-year bonds with a 2.5% coupon, expanding an €850 million transaction it had completed on Jan. 16. Pricing information wasn’t available. Digital also priced £150 million ($200 million) of 3.75% notes at a price yielding 3.645%. That deal enlarged a £400 million offering of 12-year bonds that it floated on Oct. 17. Digital Realty said it may use the proceeds to refinance outstanding debt, but pledged to allocate equivalent amounts of capital to environmentally friendly projects in the future.

Fifteen REITs have now floated $8.2 billion of REIT bonds so far this year, up from $7.7 billion a year ago, according to Commercial Mortgage Alert’s REIT-Bond Database.