U.S. Equity REITs Showing Discipline in Capital Markets, Observers Say

Capital raising by U.S. Equity REITs for most of 2014 has trailed the record levels seen a year earlier, a sign that management teams are taking a disciplined approach to raising new equity, according to observers.

SNL Financial reported this week that capital raised by U.S. Equity REITs dipped to $51 billion for the year through Oct. 17, trailing the record-setting $56 billion raised during the same period in 2013.

Retail REITs have raised the most capital among U.S. Equity REITs in 2014 with $11 billion, according to SNL. Specialty REITs, which invest outside what SNL defines as the traditional real estate sectors, and health care REITs followed in second and third place with $9.9 billion and $9.0 billion, respectively, according to SNL.

Vivek Seth, managing director at Raymond James, said one reason for the decline in U.S. Equity REIT capital raising is that while REIT share prices have rebounded in 2014, they’ve only recently passed last year’s high. This has deterred management teams from new issuances.

“Management teams are being very disciplined about what prices they want to raise additional equity,” he said. At the same time, rising asset prices have put a damper on REIT acquisitions, which, in turn, has reduced the need for additional equity to fund growth, Seth explained.

Going forward, Seth said he expects to see a rebound in issuance in 2015, “but not nearly to the levels of 2013.”

Scott Crowe, global portfolio manager with the Resource Real Estate Diversified Income Fund, said he foresees Equity REITs eventually raising about the same amount in 2014 as they did last year, when Equity REITs raised a record total of $77 billion.

PNLR Capital Raising Weakens in 2014 After Active Recycling in 2013

Meanwhile, Robert A. Stanger & Co. reported that capital raised for PNLRs dropped to $12 billion in the first nine months of the year from $15 billion in the same period a year before.

Seth noted that 2014 has not been able to match the previous year’s amount of capital raising because 2013 was marked by a high level of investor proceeds recycling back into the market.

“As you’ve seen the recycling funnel through, you don’t have quite the same level of monetization happening in 2014,” Seth said. One reason is that investor proceeds are being redeployed at higher prices and lower yields, “and, therefore, the arbitrage between purchase and resale is just not there anymore.”

Crowe said he has not been surprised by the slowdown in PNLR capital raising this year.

“The [PNLR market] capital raising has slowed, but from a huge increase in the last couple of years,” he said.

Meanwhile, new guidelines from the Financial Industry Regulatory Authority (FINRA) aimed at increasing investor insight into PNLRs have created a “wait-and-see” attitude for potential investors, Seth said. Crowe agreed that the new FINRA rules have created uncertainty.

Looking ahead, Seth is projecting that capital raising in the PNLR sector will be “modestly lower” next year.