CHARLOTTESVILLE, VA—Uh oh REITs, it looks as though your capital-market raising magic may be on the wane this year. Or maybe not. Yes, REITs have raised significantly less capital year to date in 2014 compared to what was raised in 2013 for the same period, according to SNL Financial. However, James Mathieu, a senior analyst in the firm’s Real Estate Research office, explains why this year’s numbers are not aligning as closely with 2013; reasons that are fairly benign to the industry in the big picture.
First, though, the stats.
SNL Financial reports that US equity REITs raised a total of $13.33 billion in capital year-to-date as of April 4, compared to $19.45 billion raised during the same period in 2013.
The capital raised via common equity amounted to $3.31 billion, senior debt offerings generated $9.42 billion and $602.5 million was raised through preferred equity offerings through April 4. During the same period in 2013, REITs had raised $9.33 billion from common equity offerings, $7.08 billion from senior debt issuances and $3.04 billion from preferred equity offerings.
Some of the discrepancy is common sense, Mathieu says. For example, senior debt issuances were up in 2014 compared to 2013. It can be theorized this is due to still-low interest rate environment-and the likelihood that rates are going to rise.
More interesting is his analysis about the equity markets and why fewer REITs are tapping it this year. Mathieu notes that NAV (net asset value) premiums have been flat or even trading at a discount this year for US REITs. “Companies would rather raise equity when it is trading at a premium when they can get more cash for their shares,” he says.
Unraveling the question of why NAV valuations are flat is a bit harder, but one answer can be found in the decreasing equity prices of US REITs last year. These were a large driver of the increases in NAV discounts throughout 2013, Mathieu says.
Last year, the SNL US Equity REIT index price change was nearly 30 percentage points below the S&P 500. Year to date in 2014, though, an 8.5% increase in US REIT equity prices has helped to bring the premium to NAV calculation closer to equilibrium, as NAV estimates have remained fairly stable on average for REITs throughout the year, he says.
“However, due the fact that that US REITs have traded at a discount to NAV for much of 2014, REITs may be swayed toward raising capital through “cheap debt” as opposed to selling stock at a discount,” Mathieu says. “As of April 15, the average coupon rate for debt raised in 2014 by US REITs was just 4.16%, a rate that has continued to decline since the 2009 average rate of 7.19%.