Cashing Out by Nontraded Sector Expected to Accelerate, Even as Publicly Traded REITs Expect to Rein In Capital Raises Ahead of Rising Interest Rates
Listed and non-listed U.S. equity REITs raised a total of $84.13 billion from investors in 2013 -- including $18.65 billion by nontraded investment trusts, nearly double the amount of capital raised by non-listed trusts in 2012.
The strong investment in the booming nontraded sector fueled a 12% increase in overall fundraising for equity REITs from 2012 levels, according to data compiled by CoStar News from Robert A. Stanger & Co., an investment bank that tracks nontraded REITs; the National Association of Real Estate Trusts (NAREIT) and SNL Real Estate. REITs bought and sold billions in property assets as they recycled capital, exited and entered markets through various property sale transactions, mergers and acquisitions, and initial public offerings to form publicly traded REITs.
However, even as overall investment in REITs soared, share prices of publicly traded U.S. property REITs felt the sting of investor concerns following the Federal Reserve Bank’s announced plans last spring to consider tapering its quantitative easing bond purchase stimulus program.
Fundraising for the year by publicly traded REITs remained essentially unchanged, totaling $65.48 billion in 2013, compared with $65.75 billion raised in 2012.
Fed Sneezes, Traded REITs Catch Cold
Statements by Fed Chairman Ben Bernanke caused interest rates to spike and threw a scare in REIT investors over concerns that values would suffer, hurting the performance of traded REIT shares in the second half of 2013.
Both common equity and preferred equity offerings by publicly traded companies raised less capital in 2013 than totals for each type the previous year, according to data from SNL Real Estate. U.S. equity REITs raised $30.80 billion in common equity and $5.15 billion in preferred equity, compared to $31.98 billion and $9.11 billion, respectively, in 2012.
Only senior debt offerings by publicly traded companies raised more in last year than in 2012, a total of $29.53 billion in 2013 versus $24.65 billion in 2012.
When mortgage REITs are included, listed investment trusts raised $76.96 billion, including $46.2 billion of equity and $30.7 billion of debt in 2013 -- breaking 2012’s record of $73.33 billion, noted the National Association of Real Estate Investment Trusts (NAREIT).
About $5.7 billion of that total was raised in 19 IPOs, the largest and most active year for REITs going public since 2004. Nearly one-third of 2013 REIT IPOs were launched by mortgage REITs, reflecting the growing strength of single-family and commercial property financing.
Retail REITs led all capital raisers last year in the publicly traded space at just under $14 billion, followed by specialty REITs ($9.93 billion) and health care REITs ($9.28 billion), according to SNL data.
Health Care REIT Inc. raised the largest amount of common equity with a $1.69 billion offering completed in May. American Homes 4 Rent, a single-family REIT, raised $1.63 billion through five offerings, including its $812 million IPO completed on July 31.
Ranking third in common equity raised is warehouse owner and developer Prologis Inc. with $1.48 billion raised last year. Net-lease owner Realty Income Corp. raised $1.19 billion with two offerings valued at $791.8 million and $397.2 million.
Rounding out the top five was Empire State Realty Trust Inc., which raised $1.07 billion on Oct. 1. Honorable mention goes to Blackstone-backed Brixmor Property Group Inc., which raising $948.8 million in proceeds, also from an October IPO.
"Overall, the capital environment continues to be supportive for REITs," analyst Michael Bilerman wrote in Citi's recent 2014 REIT outlook. "While capital costs have risen from their lows, REITs maintain considerable access to the capital markets, at still attractive and historically low all-in costs," allowing companies to groom balance sheets and grow through property acquisitions and development and redevelopment pipelines.
Also, in terms of overall market capitalization, listed REITs continued to grow in 2013 to $670 billion, up from $603 billion at the end of 2012. The number of companies in the FTSE NAREIT All REITs Index rose from 172 companies at the end of 2012 to 203 last year.
Heading for the Exits
According to data released by Robert A. Stanger & Co. Inc., equity non-listed REITs about doubled the $9.36 billion raised in 2012 as a number of non-listed companies executed exit strategies through liquidation or mergers, most prominently through massive transactions executed by American Realty Capital Properties (Nasdaq: ARCP
) and Cole REIT (NYSE: COLE
"The most significant factor lifting the industry to new levels of equity fundraising is successful liquidity events," said Kevin Gannon, managing director of Stanger. During 2013 seven non-listed REITs provided liquidity events which returned over $16 billion to investors.
Liquidity events can take the form of portfolio sales, mergers or listings of matured non-listed REITs formed in prior years. These events provide either liquidating cash distributions to investors or shares of a publicly traded company which can then be sold on a national exchange. During 2013 seven non-listed REITs provided liquidity events, returning over $16 billion of equity to their investors.
"These successful liquidity events have both motivated investors in these non-listed REITs to commit capital and reinvest in new programs organized by the same sponsor -- and confirmed for financial advisors the ability of direct investments to provide growth along with above-average current income," said Kevin M. Hogan, president and CEO of the Investment Program Association, a trade organization representing nontraded REITs and other direct investment entities, such as business development companies (BDCs), energy and equipment leasing programs and private equity offerings.
The capital flows from the non-listed sector will continue into 2014, with about $6.5 billion is liquidations and listings announced and expected to close during the first quarter of 2014, according to Stanger.