Retail Financing Flows to Favored Borrowers and Property Types
Nov 10, 2009 3:19 PM, By Beth Mattson-Teig
REITs tap capital
REITs are one of the few entities that have experienced a dramatic improvement in accessing capital markets during the last six months. Many REITs are finding success accessing both debt and equity markets. They are using that capital to improve financial footings by paying down debt and refinancing maturing loans.
Take Simon Property Group. Between March and August the debt costs dropped considerably. Back in March, when credit markets were virtually shut down, Simon sold $650 million worth of senior notes priced at 10.35 percent. The notes were priced at 97.578 percent of the principal amount to yield 10.75 percent to maturity. In May, conditions had improved enough that a new $600 million senior notes offering by Simon was priced at 6.75 percent. The notes were priced at 98.960 percent of the principal amount to yield 7.00 percent to maturity. Then, by August, Simon had re-priced the May issue. In that adjustment, the notes were priced at 105.029 percent of the principal amount plus accrued interest from May 15, 2009 to yield 5.46 percent to maturity.
In addition, retail REITs' public equity started flowing back into the REIT sector in second and third quarters. “You had REITs that were both well positioned, and even those that were balance sheet challenged REITs, that were able to access the equity markets,” Garside says. In a lot of cases, they were doing so at a huge discount—especially in the case of REITs that were struggling. “But that access to equity has really helped to either repair balance sheets, or in the case of healthy companies, improve balance sheets and position them well to take advantage of the investment opportunities that everyone thinks are coming,” he adds.
The volume of retail investment deals grew quarter-over-quarter during the third quarter for the first time in two years. However, deal volume remains a fraction of what it was during the industry's peak years.
Publicly traded REIT prices plummeted along with the rest of Wall Street and bottomed in March. At that time, the Morgan Stanley REIT index had lost nearly 80 percent of its value from its early 2007 peak. Since then, however, the index has clawed its way back up and more than doubled in value. The 23 publicly traded retail REIT stocks have posted year-to-date returns of 16.59 percent through Sept. 30, compared to 2008 returns of -48.36 percent, according to NAREIT.
On the non-traded REIT side, the fact that people are looking for diversification, non-correlated assets away from the stock market, and investments with a better income stream has fueled investment in REITs in the last six to eight months. By law, 90 percent of REIT operating income has to be distributed. “Investors are looking for diversification and capital preservation, but what really gets investors off their hands is the valuations that are out there right now, considering you can get good quality, tenanted real estate with higher cash flows than you could 24 months ago,” Genovese says.
Seizing on that opportunity, in August, Thompson launched its TNP Strategic Retail Trust, a public, non-traded REIT, to take advantage of some of the buying opportunities in the retail sector. The goal is to raise $1 billion in equity by mid-2013. “Broker-dealers and the public are not willing to throw money at brand new sponsors, but the fact that we have strong relationships with the broker-dealer community and a long history have really helped us,” Genovese adds. Thompson currently has about 200 selling agreements in various products with 100 different broker-dealers.
Next page: Tougher underwriting
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