Fitch: U.S. REIT Capital Access ‘Bifurcated’

Real estate investment trust unsecured debt capital market access remains bifurcated between the ‘haves’ and ‘have lesses,’ reported Fitch Ratings, New York.

Fitch said absolute and relative REIT liquidity remains strong, “but less capital issuance breadth in terms of number of transactions and issuers and greater reliance on bank unsecured revolver and term loan borrowings reveal weaker trends beneath the surface.”

While last year ratings and seasoning topped investors’ minds, this year investors express the importance of offering size–and therefore trading liquidity–as higher regulatory capital requirements have made banks less willing to inventory bonds to facilitate market making.

“In today’s market, issuance sizes of roughly $350 million or more are generally needed to attract public bond investors,” Fitch’s U.S. REIT Capital Access Divided Between Haves and Have Less report said. “Previously, the unchanged $250 million index-eligible minimum bond issuance size was generally adequate for best execution pricing.” 

Fitch noted that REIT bond investors also stress the importance of regular issuance expectations to justify the coverage time and effort.

“Recent issuances support our view that REIT bond investors are placing a primacy on transaction liquidity over ratings or seasoning,” Fitch said. It cited Sovran Self Storage REIT, which re-opened the public unsecured bond market for inaugural issuers in June, placing $600 million of 10-year notes at Treasury plus 195 basis points. Care Capital Properties REIT, another inaugural issuer in the less traditional asset class of skilled nursing facilities, issued $500 million of 10-year notes at Treasury plus 373.5 basis points this month.

Fitch said recent VEREIT and Brixmor Property Group issuances–although not inaugural public deals–offer additional evidence of liquidity being prioritized over ratings or seasoning. “Both issuers completed sizable offerings following accounting scandals that are in varying stages of resolution by new management teams,” the report said. 

The report also noted that 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 and term flexibility, which can help REITs better balance maturities,” the ratings agency said.