April 22, 2009 2:09 pm

REITs advised to recap in the equity market before rally is over

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REITs with total debt to capitalization near 60% and debt obligations as a percentage of assets of more than 35% through 2012 are expected to come to market to issue equity in the coming weeks and months, underwriters currently in talks with REITs told dealReporter.

There is an appetite from institutional investors to support high quality names across all five food groups: residential, commercial, retail, hospitality, and industrial. Investors are willing to take up to USD 100m chunks of fresh equity while asking for 5% to 9% discounts on common shares, underwriters said. An increased flow of reverse enquiries from institutional investors are driving some of the recent equity deals, the sources said.

Kimco’s 91.5m equity offering last week, was prompted by demand from the market, said sources close to the company.

“We have been telling people get out and issue equity and be one of the first guys to do it; there is not enough money to recapitalize everyone,” said one underwriter currently working on similar deals.

One of the prime candidates expected to come to market in the upcoming months is Avalon Bay (NYSE: AVB BBB+/Baa1), the Virginia-based multi-family REIT. The company has a 49.52% total debt-to-capital ratio and maturities totaling USD 1.672bn through 2012, said one underwriter close to the company.

The underwriters pegged additional candidates in the residential corner of the market likely to tap the equity market including: UDR (NYSE: UDR) with a 63.64% debt-to-capital ratio and a total of USD 1.8bn in maturities through 2012; Associated Estates Realty (NYSE: AEC) with a 141.34% debt-to-capital ratio and a total of USD 310m in maturities for the same period; Camden Property Trust (NYSE: CPT) with a 59.88% debt-to-capital ratio and a total of USD 1.68bn in maturities through 2012; Home Properties (NYSE: HME) with a 65.82% debt-to-capital ratio and a total of USD 1bn in maturities through 2012.

Outside of residential real estate companies, healthcare and commercial players are also expected to jump on the capital raise bandwagon, looking to issue more equity.

HCP (NYSE: HCP BBB/Baa3), the healthcare REIT, with a 50.23% debt-to-capital ratio and a total of USD 2.18bn in maturities through 2012, was said to have the support of the equity market and could be the next equity candidate. “The healthcare guys have come off a bit, but they are not as beaten down as the rest of the sector,” one of the underwriters aid.

Many of these companies are currently rightsizing their balance sheets for a potential follow-up bond offer, the underwriters said. However, they cautioned that anyone with more than 50% debt-to-total assets is currently locked out of the debt market and will need to do more deleveraging before entertaining tapping this part of the market.

The bond market is still preserved exclusively for REITs with the best portfolio of real estate assets and the right credit parameters.

“Simon did it because they are the best, and to demonstrate that they can do it,” said one real estate banker. Last month, Simon Properties (NYSE: SPG A-/A2) issued USD 650m at 10.35% in senior notes due 2019.

This week, Ventas (NYSE: VTR BBB-/Ba1), another healthcare REIT, issued USD 200m, 6.5% senior 7-year notes and 12.75m shares for USD 23.90 per share thanks to the defensive nature of healthcare REITs and an attractive 9.597% YTM. Other REITs which could price an unsecured bond below ten would jump at the opportunity, underwriters said.

Still, the equity market could be the cheapest way for REITs across the board to raise capital. Recent equity deals by REITs have demonstrated the willingness of the market to give generous discounts.

Simon Properties also issued 17.2m shares of common stock for USD 31.50 per share a 10.5% discount to the closing price on 24 March.

Kimco (NYSE: KIM BBB+/Baa1) issued 91.5m shares at USD 7.10 per share, representing a 24.46% discount to the closing price on 3 April.

Prologis (NYSE: PLD BBB-/Baa2), however, issued 152m shares at USD 6.60 per share, at only a 3.2% discount, following announcement of its aggressive deleveraging plan.

One underwriter said, currently, the fundamental decision for corporates is whether to allow for a deep discount on your equity and secure capital now or wait for a better rally.

Other REITs like Boston Properties (NYSE: BXP A-/Baa2) and Vornado (NYSE: VNO BBB+/Baa2), although not currently looking to issue equity, could potentially come to market if the rally continues.

REITs have realized there is a window of opportunity. The large, high caliber names are getting ready to tap the equity market, waiting for the market’s next positive momentum, all of the sources agreed.


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