Surge in REIT Bonds Has Likely Hit a Peak

Corporate-bond issuance by REITs surged to another record in 2013, but market pros expect volume to flatten out or dip this year.

Some 47 REITs floated $27 billion of unsecured bonds last year, eclipsing the previous mark of $23.3 billion set the year before, according to Commercial Mortgage Alert’s REIT-bond database. The torrid pace far exceeded the forecasts of industry experts, as interest rates remained historically low, prompting REITs to keep hitting the bond market to refinance debt and fund acquisitions.

J.P. Morgan was the top bookrunner of REIT bonds for the second year in a row, leading $4.5 billion of offerings for a 16.6% market share. The bank’s volume surged 33%, more than double the 16% gain in total issuance. Bank of America remained in second place, with $3.9 billion of assignments and a 14.4% market share. Rounding out the top five were Wells Fargo with $2.8 billion of mandates (10.4%), Citigroup with $2 billion (7.5%) and Barclays with $1.6 billion (6%).

A separate ranking that gives full credit to all members of underwriting syndicates also showed J.P. Morgan in the top spot. It was hired as lead- or co-manager on $15.4 billion of deals — giving it a hand in 57.3% of last year’s volume. Next came BofA with $13.1 billion (for a 48.7% slice of the business), Barclays with $10.63 billion (39.4%), Wells with $10.58 billion (39.3%) and Morgan Stanley with $10.1 billion (37.5%). The 2012 frontrunner in that category, RBC Capital, slipped to seventh place with $9.1 billion of assignments, for a 33.7% market share.

Annual issuance has almost doubled since 2011, fueled by the combination of low interest rates and a revived real estate market. REITs have stepped up issuance to cover maturing liabilities ahead of schedule and to fund acquisitions. Debut offerings also played a big role last year.

Many had expected activity to cool in 2013. Even after a strong first half, the expectation was for a slowdown in the last six months. Instead, $15.2 billion of deals priced during the July-December stretch, making it the busiest half ever.

The consensus now is that, after gorging themselves on rock-bottom rates over the past two years, most REITs have raised more cash than they can put to work in the short term.

“It would be hard for the sector to keep up the pace set in 2013,” said Steven Marks, head of Fitch’s U.S. REITs group. “There’s no pressing need. Companies have been quite active on the pre-funding side.”
Marks and other bond pros, such as Wells analyst Thierry Perrein, expect issuance to be flat or slightly down this year. But some are more bearish, projecting that the annual total could slip below $20 billion. S&P estimates issuance in the $18 billion-$21 billion range. And Philip Kibel, Moody’s team leader for REIT bond ratings, puts it even lower, between $16 billion and $18 billion.

Kibel said a number of REITs that had planned to float bonds in 2014 seized the opportunity to issue in 2013 instead, ensuring they won’t be harmed should rates spike this year.

As always, volume predictions are clouded by the difficulty of forecasting how much issuance will stem from REIT acquisitions — of properties and rival companies — or from the emergence of new issuers.
Thirteen REITs tapped the market for the first time last year, for a total of $5 billion via one or two offerings apiece. Perrein said about 10 more debut issuers could surface this year, several of them from nontraditional property sectors. “The net-lease and self-storage sectors are the ones to watch now in terms of consolidations, acquisition transactions and possible issuance,” he said.

REITs have increasingly turned to corporate bonds as an alternative to mortgages. AllianceBernstein analyst Kimberly DiMattia noted that secured debt can complicate a REIT’s need to respond to changing market conditions by redeveloping or repositioning assets. “Corporate debt makes it easier for the issuers,” said DiMattia. “It gives them more flexibility. If there’s a mortgage in place and a REIT wants to make changes to a property, it has to consult the lender.” She said those considerations have become especially important for retail REITs as they look to reconfigure space to meet shifting tenant demands. DiMattia, formerly known as Kimberly Chan, is among those expecting issuance to be steady or a bit reduced this year.

A rise in interest rates, which many expect, would constrain REIT-bond issuance, by reducing the impulse for a REIT to crank out more bonds than it needs to cover near-term liabilities.

However, a fluctuation in rates could prompt some REITs to issue bonds opportunistically, said Scott Crowe, who runs an investment-fund unit at Resource Real Estate that targets REIT securities. “The rise in Treasury yields is going to be choppy. It’s going to be volatile,” he said. “As you see spots [when yields dip briefly], REITs will take the opportunity to lock in lower rates.”

Marks concurred, noting that “the concept of pre-funding maturities is not going away.” Such activity would be most likely in the second half, as REITs prepare to deal with a larger volume of debt coming due in 2015, he said.

Wells estimates that U.S. investment-grade REITs have $7.5 billion of unsecured debt coming due this year — $5 billion of corporate bonds, as well as term loans and convertible bonds. In 2015, that will rise to $11.8 billion, including $8.8 billion of corporate bonds.