U.S. REITs Use Stock Sales to Grow After `Balance-Sheet Repair'
U.S. real estate investment trusts are selling shares to fund property acquisitions after using record cash from equity offerings last year to reduce debt and cover dividends.
Landlords including BioMed Realty Trust Inc. have sold $1.38 billion of stock since Sept. 17, making this week the biggest in five months for new secondary offerings by REITs, according to data compiled by Bloomberg. They join property owners such as UDR Inc. and Duke Realty Corp., which have sold shares this year to fund acquisitions.
REITs completed $21.2 billion in secondary sales last year, the most in data going back to 1992, according to the National Association of Real Estate Investment Trusts. While offerings in 2009 were used primarily for “balance-sheet repair,” money raised this year is funding purchases intended to boost earnings, said Michael Knott, managing director at research company Green Street Advisors in Newport Beach, California.
“For the most part, companies are pairing equity raises with external growth opportunities,” Knott said in a telephone interview. “Over the next few years, our hope would be to see companies elect to fund acquisitions with equity so they could still reduce balance-sheet leverage over time.”
U.S. REITs that own real estate raised $11.8 billion in secondary offerings this year through yesterday, data from Charlottesville, Virginia-based SNL Financial show. That’s about half what they raised in all of 2009, when the companies were shoring up their finances during the recession. Commercial property values sank as much as much as 44 percent last year from the 2007 peak, according to Moody’s Investors Service.
This year’s secondary offerings by property REITs are the third-highest in SNL data going back to 2000.
The volume of U.S. commercial property transactions is beginning to rise after owners previously were reluctant to sell with the drop in prices. The market for buildings is picking up, and more is available for purchase, Knott said.
UDR, which owns apartment buildings across the U.S., sold shares this month to help pay for a $455.1 million acquisition of five apartment complexes and the development of one more. The purchase of the five properties, in California, Massachusetts and Maryland, will be funded with 87 percent equity, according to a presentation that the Highlands Ranch, Colorado-based company filed with regulators.
UDR planned the stock sale, with proceeds of $359 million, to make the acquisition, add rental revenue from the apartments and improve the company’s balance sheet, Chief Executive Officer Thomas Toomey said.
“It’s a great opportunity for us,” he said in a telephone interview. “Overnight, you can raise $350 million.”
Duke Realty used part of the $310.8 million raised in a June share sale to buy out a joint-venture partner for $298.2 million including assumed debt. The venture owns 106 industrial buildings and 63 acres (25 hectares) of undeveloped land in the Midwest and Southeast, according to Indianapolis-based Duke, which has properties in 18 U.S. cities.
“It was a good-sized transaction and made sense to where our stock price was at the time,” Randy Henry, director of investor relations at Duke, said in a telephone interview. The share sale enabled the company to lower its debt-to-equity ratio and add properties already under management to its industrial portfolio, he said.
Alexandria Real Estate Equities Inc., Winthrop Realty Trust, Health Care REIT Inc. and CommonWealth REIT all sold shares to the public this week. BioMed and Realty Income Corp. are using part of the proceeds from their secondary offerings to pay for acquisitions.
REIT Purchases Rise
REIT property purchases may rise to $16 billion this year from $4 billion in 2009, according to a Sept. 15 report by Jordan Sadler, senior REIT analyst at KeyBanc Capital Markets Inc. in New York.
“The next wave of equity you’re going to see will be related to specific acquisitions,” Mary Hogan Preusse, managing director and co-head of Americas real estate at APG Asset Management US Inc. in New York, said in a telephone interview. “With proven access to varied sources of capital, REITs can close the deal.”
Preusse’s firm is part of APG, the Dutch pension system that had about 250 billion euros ($333 billion) under management at the end of July.
Sales of commercial real estate in the U.S. rose to $36.2 billion in the first half of 2010, up 67 percent from a year earlier, according to New York-based research company Real Capital Analytics Inc.
“My sense is that the investment market is picking up and there’s more product for sale,” said Knott of Green Street.
Three of the top five purchasers of property this year are REITs, led by mall owner Simon Property Group Inc., according to data from Real Capital.
Simon, based in Indianapolis, bought Prime Outlets Acquisition Co. for $2.3 billion in August. Jacksonville, Florida-based Regency Centers Corp., an owner of neighborhood shopping centers, and Digital Realty Trust Inc., a data-center landlord based in San Francisco, also are in the top five.
The 117-member Bloomberg Real Estate Investment Trust Index advanced 3.1 percent today in New York. The index has gained 18 percent this year.
Among REITs that completed secondary offerings this year, the Duke sale “was one deal that investors got behind,” Knott said. Toomey, UDR’s CEO, said there was healthy demand for the shares his company sold this month.
“It signifies that there are a lot of investors sitting on cash,” he said.
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