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CMA
February 14, 2020  

REITs Printing Bonds at Breakneck Pace

REIT-bond issuance is off to a blistering start this year, defying expectations that volume would level off after hitting an all-time high in 2019.

The $10.9 billion of unsecured debt U.S. REITs issued in January shattered the previous record for the first month of the year of $6.5 billion, set in 2016, according to a database maintained by Commercial Mortgage Alert. And issuance during the first two weeks of February totaled $6 billion, which exceeds the full-month high of $4.3 billion of paper sold in February 2014.

Indeed, the tally for the first six weeks of 2020 already is greater than the entire first-quarter total in any previous year.

“I’m totally buried,” one investor said of the number of offerings he’s had to review since the start of the year. “It’s just crazy. It’s hard to see this continuing at the same pace.”

Heading into 2020, analysts predicted REITs would tap the brakes after selling a whopping $67.3 billion of bonds last year — some 30% more than the previous record of $51.8 billion in 2017. Part of the thinking was that because REITs took advantage of rock-bottom interest rates to refinance a mountain of existing debt, they would have less of a need to issue this year.

But with uncertainty around the U.S. presidential election clouding the outlook for the second half, REITs appear to be accelerating their 2020 issuance plans. Analysts including Thierry Perrein of Wells Fargo said it appears issuers are striking now while market conditions are favorable.

“If you know you have something to do, why not do it now?” Perrein said. “Perhaps you think that the Treasury rate will go lower, but you don’t really want to take that chance.”

Perrein, a senior analyst, said bond issuance by REITs could accelerate further as companies wrap up their fourth-quarter earnings calls. Issuance activity typically dips during earnings season, he noted.

REIT-bond offerings exploded in the third quarter of 2019 as the 10-year Treasury yield fell to a multi-year low. Issuers rushed to refinance existing debt ahead of schedule, in some cases retiring bonds that weren’t due to mature until 2023.

The current wave of issuance is driven more by investment strategy, said Philip Kibel, who leads Moody’s REIT ratings team. “Last year, the REITs were paying off upcoming debt,” he said. “This year, every transaction we have rated has been related to investment.”

A case in point is industrial REIT Prologis, which sold $2.2 billion of bonds on Feb. 3 in conjunction with its $12.6 billion purchase of another REIT, Liberty Property. Another pending M&A deal, Simon Property’s Feb. 11 bid for an 80% stake in Taubman Centers, likely will be financed in part by a bond issue when the $7.6 billion transaction closes in the second quarter.

Among the most-active issuers so far this year are specialty REITs focused on wireless infrastructure. American Tower, CyrusOne, Digital Realty, SBA Communications and Uniti Group have sold a combined $7.2 billion of unsecured debt year-to-date.

While REITs started 2020 in strong financial shape, thanks to the wave of refinancings last year, the sheer volume of bond issuance has investors proceeding cautiously.

“These folks have cleaned up their maturity ladders, so liquidity risk is much improved,” one investor said. “But the acquisition multiples are rising. I’m not sure if all this activity is masking something.”