REIT Equity Markets Recover from Historic Sell-Off in First Quarter
Kroll Bond Rating Agency says the REIT sector is finding its “mojo,” and REIT debt-to-market leverage reached record lows by mid-year 2018, declining to a median of 30.2% for public and private note issuers.
NEW YORK CITY—After a more than 10% decline in value, REIT equity share prices staged an impressive recovery in the second quarter of this year, gaining 11.1% in the three-month period and another 3.6% through the month of August.
Kroll Bond Rating Agency says the REIT sector is finding its “mojo,” and REIT debt-to-market leverage reached record lows by mid-year 2018, declining to a median of 30.2% for public and private note issuers. In terms of equity share prices, REITS recovered their first quarter losses and are now high year-to-date as compared to the mid-point of 2017, the KBRA special report reveals.
KBRA also notes that the lagging mall and shopping center REIT sectors rebounded in the second quarter, as did retail department stores that year-to-date have been one of the strongest industry equity market groups.
“Catalysts for the rebound included a ceiling on 10-year treasury yields that settled into the high 2% range after surging nearly a half-percent between December and February, nine REIT mergers or acquisitions (served) as a reminder that private real estate funds sit on record dry powder to effect public/private arbitrage and realization that commercial projects would likely be less directly impacted by tariff wars than other industries,” KBRA states in the report.
Another major trend in the second quarter was the slowdown of REIT unsecured public offerings and the ramp up of term loans. REIT public offerings declined 38% to $13.5 billion in the first half of 2018 as compared to the mid-point of 2017. The public offerings accounted for 54% of REIT unsecured financings. “Much of the decline was anticipated by market participants, as 2018 maturities were re-financed early to take advantage of lower rates,” KBRA notes. “Public issuers’ increased use of term loans has also contributed to the decline.”
REIT private placements declined only 6% to $2.7 billion year-over-year, representing 11% of REIT unsecured financing for the first half of 2018. REIT term loan commitments (including delayed draws) have increased 3% to $8.7 billion so far this year, representing 35% of REIT unsecured financing.
KBRA in its bullish report states, “If REITS aren’t in the sweet spot for capital raising and allocation, they’re not far from it. Favorable borrowing costs and more agreeable equity valuations have become aligned with robust demand for properties and the backdrop of consistent economic and employment growth. The menu of REIT capital raising options has rarely, if ever, been broader.”
Some of the more significant findings in the KBRA report include:
• With improved equity market valuations, REITs have access to a broad menu of capital raising alternatives, particularly within the unsecured debt market where private placements and term loans have gained share from the public market, offering competitive pricing and more flexible terms.
• Alignment of shareholder and creditor interests is evident in the REIT sector, where lower-leverage REITs have substantially outperformed in the equity market, engendering a greater willingness to raise equity, expand portfolios and enhance diversification.
• Lower borrowing costs for REIT unsecured debt than mortgage loans further align shareholder and bondholder interests, with unsecured borrowers prompted to avoid and retire mortgage debt.
• REIT unsecured debt ratings appear low relative to corporate sectors with weaker covenant protection and CMBS with greater “look-through” leverage and less favorable asset quality.
KBRA’s report covered 116 REITs that placed unsecured debt, including 66 REITs that issued notes in the public market, 28 REITs that issued unsecured notes but only via private placements and 22 REITs that borrowed via unsecured term loans but not unsecured notes.