REIT Capital Access Split Between ‘Haves’ & ‘Have Less’

By Britton Costa, Director, U.S. REITs, Fitch Ratings: Why larger issuance sizes are needed to attract public bond investors in today's market.

Fitch Ratings Portraits June 5th 2004 Photo © Stefan Falke

U.S. REIT capital markets access is more nuanced than headline issuance and liquidity trends suggest. Unsecured debt capital markets access remains bifurcated between the “haves” and “have less,” but for different reasons than a year ago.

Absolute and relative REIT liquidity is strong, but less capital issuance breadth in number of transactions and issuers, as well as greater reliance on bank unsecured revolver and term loan borrowings, reveal weaker trends beneath the surface.

Issuance size and frequency–the larger and more often, the better, from the perspective of many unsecured bondholders–have conditioned debt capital access during 2016. Investors have voiced the importance of offering size, and hence trading liquidity in the context of higher regulatory capital requirements that have made banks less willing to inventory bonds facilitate market making.

In today’s market, issuance sizes of roughly $350 million or more are generally needed to attract public bond investors. Previously, the unchanged $250 million index-eligible minimum bond issuance size was generally adequate for best execution pricing. REIT bond investors also stress the importance of regular issuance expectations to justify the coverage time and effort.

Recent issuances support Fitch’s view that REIT bond investors are placing a primacy on transaction liquidity over ratings or seasoning. Recent examples include Life Storage (formerly Sovran Self Storage), which relaunched the public unsecured bond market for inaugural issuers in June with a $600 million issue of 10-year notes. Another good example is Care Capital Properties, another inaugural issuer in a less traditional asset class, which issued $500 million in 10-year notes. Spirit Realty Capital and Kite Realty Group have also recently joined the ranks of inaugural issuers.

Additional evidence of liquidity being prioritized over ratings or seasoning can be found in recent issuances by VEREIT and Brixmor Property Group. Though they were not inaugural public deals, these two issuers completed sizable offerings following accounting scandals that are in varying stages of resolution by new management teams.

Some REITs selectively returned to private placement unsecured bonds instead of risking a potentially inhospitable public REIT bond market. Fitch believes several credit benefits stem from the flexibility provided by private placement issuance, including delayed draw features, smaller offering sizes and term flexibility, which can help REITs better balance maturities.