Red-hot US investment-grade market attracts REITs

Fri Jun 22, 2012 1:53pm EDT

NEW YORK, June 22 (IFR) - Real Estate Investment Trusts (REITs) are increasingly looking to the US investment-grade bond market as a viable funding option, drawn in by low interest rates, rising optimism about their business and a growing hunt for yield among investors.

One US REIT made its debut in the bond market this week, while another managed to sell 10-year bonds -- even though it had a credit rating split between junk and investment grade.

The order books on both deals were heavily oversubscribed, bolstering expectations that more US REITs would attempt to issue unsecured bonds and add to a growing pipeline of issuers in a red-hot investment-grade market.

The REIT sector has experienced many ups and downs. It was best-performing sector during the credit bull market of 2009-2010 until a reversal in macro-economic sentiment emerged in August-September 2011.

Since then, however, a growing group of believers in the sector has emerged and well-known issuers have regularly tapped the bond markets.

REIT balance sheets are in a position to withstand any potential economic turmoil, according to a Bank of America Merrill Lynch report published in May.

Their liquidity position is also better as they have extended debt maturity schedules, paid down debt or refinanced credit facility borrowings, said the report.

More REITs are now taking that extra step towards public markets.

Self-storage REIT CubeSmart (Baa3/BBB-) this week decided to add unsecured bonds to its balance sheet funding strategy because doing so gives it the flexibility to actively manage its asset portfolio.

The diversity of that portfolio and relatively small individual property values were not conducive to collateralisation and the company was keen to widen the array of funding sources.

"[Self-storage REITs] is just a solid sector with very little debt to be bought," said one banker. "It should really be more in line with the multi-family sector in my opinion. People move to rentals and don't want to get rid of their stuff."

FUNDING OPTIONS

CubeSmart's US$250m 10-year unsecured notes were well-oversubscribed despite pricing inside guidance. Initial thoughts were at the Treasuries plus 350 basis points (bp) area but official guidance emerged 25bp inside that and the deal priced another 5bp inside at 320bp. The coupon was set at 4.8%.

Before issuing unsecured bonds, CubeSmart raised funds through secondary equity offerings, preferred equity and through at-the-market equity programmes.

Privately, it tapped unsecured bank loans, privately-placed unsecured debt and issued CMBS or secured debt. As of March 31, 19% of the company's capital structure comprised private unsecured debt and 62% was equity. The balance consisted of secured and preferred equity.

Also this week, shopping centre REIT DDR Corp (Baa3/BB+/BB+) raised US$300m (increased from US$250m) in SEC-registered 10-year notes. Guidance came out well inside initial thoughts at plus 337.5bp area and it priced another 12.5bp inside at plus 325bp. The coupon was 4.625%.

The book size on the deals was about US$1.2bn apiece.

"In past years you would see 50 to 100 investors [buying such deals] but now you are seeing 150 and more investors," said a senior banker. "Previously it was primarily insurance companies and now new investors, including more money managers, are figuring in order books."

Still, some analysts do not expect a rush of REIT deals. They argue that capitalisation rates on investment-grade type properties have compressed to a point that makes acquisitions difficult, while uncertainty around long-term demand growth is preventing development outside of the multi-family space.

"This lack of development and acquisition opportunities, as well as the aggressive balance sheet management strategies enacted by REITs of the last couple of years which resulted in a well staggered and long-lived debt maturity profile, leaves REITs with little need for capital," said one.

Most REIT management teams were simply unwilling to accept the dilution associated with raising capital without a use for it.

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