REIT Capital Raising Buoyed by Low Interest Rates

REITs raised more capital in the first half of the year than they did in the same period of 2016, as companies continue to take advantage of low interest rates, according to analysts.

Through June 30, REITs raised a total of approximately $44.2 billion in 2017, 17 percent more than the $37.9 billion raised during the first half of 2016, according to NAREIT data.

“Capital markets are active and healthy. There’s a significant amount of capital committed to real estate,” said David Kessler, national director of CohnReznick’s commercial real estate industry practice.

REITs raised $21.7 billion in unsecured debt in the first half of 2017, an increase of 7 percent from the $20.3 billion in the first half of 2016.

Jeff Horowitz, global head of real estate, gaming and lodging at Bank of America Merrill Lynch, noted that there has been healthy demand from investors looking for yield on investment-grade debt.

Keven Lindemann, senior director of global real estate at S&P Global Market Intelligence, added that companies have had fairly consistent access to the unsecured debt market.

“Despite the threat of higher interest rates, on an historical basis, rates are still extraordinarily low, and you are seeing companies take advantage of that,” he said.

As for capital raising on the equity side, the market has been receptive to companies that can demonstrate a good use of the proceeds, according to Horowitz. “The markets have been relatively wide open,” he said.

REITs raised $19.8 billion in secondary equity in the first half of 2017, up 21 percent from the total of $16.3 billion raised in the same period a year before. REIT initial public offerings (IPOs) raised $2.6 billion in 2017 through June 30, more than doubling the $1.2 billion raised in the year-earlier period.

Data from S&P Global Market Intelligence shows that the largest issuers of debt and equity year to date have been in the specialty REIT segment, which includes data center and timber REITs among others, at $10.2 billion. Residential REITs raised $7.8 billion, followed by retail REITs at $7.2 billion. Equinix, Inc. (NASDAQ: EQIX) and Invitation Homes Inc. (NYSE: INVH) were the most active issuers in the first half among individual companies. Equinix raised approximately $3.4 billion in debt and equity, while Invitation Homes held the second largest REIT IPO on record, raising approximately $1.7 billion.

In comparison to debt issuance, demand for new common equity has been more muted, Lindemann said. Equity REITs posted a total return of 5.5 percent for the year through July 17, according to the FTSE NAREIT All Equity REIT Index. Meanwhile, the S&P 500 recorded a total return of 11.1 percent during the same period.

“Any time you have an environment where it’s not clear that common equity issuance would be at a premium to net asset value (NAV), companies are going to be more cautious,” Lindemann said.

Kessler noted that having REIT share prices trade significantly below NAV will likely trigger increased merger and acquisition (M&A) activity. Large, well-capitalized REITs will be attracted to merging with REITs that trade at a discount to NAV.

“That’s an instant margin play for them. I think we’ll see more of that,” he said.

Lindemann said he expects REIT capital raising to slow in the third quarter and end the year in line with 2016 levels. Common equity issuance will remain subdued, and REITs will continue to tap the unsecured debt market, he said.