Retail REITs Pursue Stock Offerings in a Darwinian Battle of the Balance Sheets (6/3)
Jun 3, 2009 4:38 PM, By Elaine Misonzhnik
In early May, Simon Property Group (NYSE: SPG), the largest regional mall REIT in the country with 246 million square feet of space and a market capitalization of more than $13.7 billion, announced its second round of stock and unsecured debt offerings since the beginning of the year. The offerings included 20 million common shares priced at $50 per share, with an additional 3 million shares set aside for an overallotment option, and $600 million in senior unsecured notes. The REIT already raised $1.2 billion through concurrent stock and debt offerings in late March. With the lowest debt to total market cap ratio in the regional mall sector, at 59.10 percent, only $6.9 billion in debt coming due over the next three years and $3 billion available on its credit line, Simon did not appear under pressure to raise cash to deal with debt maturities. So why would the company decide to dilute shareholder value by issuing shares twice within the space of three months?
One answer is that with REIT stocks up considerably from lows reached earlier in the year, it is the best climate for REITs to raise cash in a while. Moreover, Simon may be gearing up to take advantage of discounted properties coming on the market over the next few years, according to Rich Moore, an analyst with RBC Capital Markets. By the time the current offerings are completed, Simon should have $2.9 billion of cash on hand, in addition to its $3 billion credit line. That will give the firm plenty of potential buying power in coming years. For example, there is already $16.8 billion worth of distressed retail assets the REIT could attempt to pluck, according to estimates from Real Capital Analytics (RCA), a New York City-based research firm. That number is likely to rise as firms face continued difficulties refinancing expiring debt. In RCA's definition, distressed assets include properties that have defaulted on loans, been foreclosed upon or transferred into the hands of special servicers or receivers. Aside from distressed assets, other owners are looking to sell non-core properties from portfolios in efforts to cut costs and raise cash.
Simon executives hinted acquisitions might be in its game plan during the company's first quarter earnings call on May 1. When asked about the possibility of bankrupt regional mall giant General Growth Properties (NYSE: GGP) putting assets up for sale, Simon CEO David Simon responded: "I think they will be out there; we just have to be somewhat patient."
Simon is not the only REIT to complete a stock offering this spring. In April, REITs conducted 17 secondary equity offerings, raising $6.4 billion, and three unsecured debt offerings, totaling $685 million, according to NAREIT. This represented the most robust run of equity transactions since the beginning of the credit crunch in August 2007. By contrast, in April 2008, REITs oversaw only four equity offerings and one unsecured debt offering that together raised a total of $856 million. In NAREIT's estimates, by 2013, publicly-traded REITs might raise $728 billion in new capital through selling debt and stock.
NAREIT estimates retail REITS administered 10 secondary equity offerings between March 6 and May 14, totaling approximately $3.75 billion. Simon, Kimco Realty Corp. (NYSE: KIM), Regency Centers Corp. (NYSE: REG), Inland Real Estate Corp. (NYSE: IRC), Acadia Realty Trust (NYSE: AKR), Weingarten Realty Investors (NYSE: WRI), Equity One, Inc. (NYSE: EQY) and Kite Realty Group (NYSE: KRG) all participated, with several additional REITs indicating they might conduct stock offerings in the near future. However, unlike Simon, which appears to be on the offensive, some REITs have not been conducting offerings out of positions of strength. Rather, in a number of cases, firms needed to issue shares to raise cash that will help the companies meet approaching debt obligations.
In fact, the sell-off activity might signal the beginning of upcoming consolidation in the retail REIT sector, with strong, well-capitalized firms swallowing smaller, debt-ridden players, according to Jon Southard, principal and director of forecasting with Torto Wheaton Research, a Boston-based real estate research firm. "It's very clear that the REIT market is trying to separate winners and losers at this point and consolidation is an extension of this," says Southard. "The strong balance sheets are going to be taking out weaker balance sheets. There will certainly be the start of it this year."
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