REIT Offerings Provide an Opening for Capital

From US Capital Trends April '09

So far in 2009, REITs (Real Estate Investment Trusts) have attracted $7.1 billion in equity capital through more than 15 equity offerings—or a stunning 63% of the $11.1 billion in combined equity and debt capital invested on direct property acquisitions YTD. And with $4.2 billion of the REIT investment total raised in April alone, it is clear that equity capital interested in real estate is currently more attracted to the liquidity and pricing offered by REIT shares than by direct investment. Including IPOs, REIT offerings for any year since 2000 have never exceeded 11% of total domestic sales volume.

The proven ability of REITs to raise equity capital in a constrained market signals at least a temporary shift toward this highly liquid class of real estate investment. By using these offerings to deleverage from an already relatively low-debt position against private funds, REITs are emerging as potentially powerful, nimble acquirers in the near to mid term as distressed assets come to market.

Non-listed or private REITs are also aggressively raising capital. Nine vehicles targeting $13 billion have been announced YTD after the sector raised $9 billion last year. Much of that money will go directly into acquisitions rather than to pay down debt, as most public REITs will do with their new funds.

Value and liquidity are clearly behind the enthusiasm of investors seeking access to real estate after being foreclosed from direct property investment by the frozen capital markets and stalled pricing.

Equity stock offerings from large companies such as Kimco as well as smaller firms such as Digital Realty are providing investors with access to companies that have had the fat peeled from their net asset values but have retained strong balance sheets.

As sales volume has dwindled, sellers of real property have clung fiercely to values set during the peak of the market. RCA data show that while sales volume for all core property types rose 32% in 2007, it fell over 69% in 2008 and another 54% through Q1'09. But prices did not keep pace: Over the same period, Moody's/REAL Commercial Property Price indexes show that prices through February 2009 were 21.5% below their peak of two years earlier.

Meanwhile, REIT investors ruthlessly marked values to market. The RMZ price-only REIT index lost 20% in 2007, 38% in 2008 and another 34% through Q1'09—but by late April had climbed back to a YTD loss of just 12%.

REIT shares certainly led pricing on the way down, so an infusion of investor equity at this point in the cycle signals that investors see value and opportunity at these price levels. The buying spree, however, may burn itself out on its own fumes as it lifts REITs just far enough out of the cellar to see that the ground floor is plenty high right now.

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