U.S. REITs Raise $12.5B in Debt, $4.1B in Equity in Second Quarter

Year-to-date, REITs have issued $25.4 billion in secondary debt, with second quarter debt issuance increasing by $2.6 billion from where it was in the second quarter of 2023.    

“The key theme here, or the big takeaway, is that capital markets are very much open for REITs,” said John Worth, executive vice president of research and investor outreach at Nariet. “REITs are actually able to get out and raise capital in equity markets and debt markets today.”

As landlords who lease space and collect rent on their properties, REITs distribute that income as dividends to shareholders. Their tax structure requires them to pay a minimum of 90 percent of taxable income to shareholders as dividends each year. 

Thus, when REITs want to grow, they have to raise capital through a combination of equity and debt offerings. While corporate debt issuance indicates the belief that bond buyers — typically insurance companies, pension funds and endowments — have in the REIT market, equity issuance is a better indicator of overall REIT health, as REITs are loath to issue shares of equity when their stock price is low. 

“Typically, equity issuance will go up and down depending on REIT performance, and, if you have a choice between issuing equity and debt, and REITs do, they’re going to skew toward using debt because they don’t want to issue equity when share prices have not performed well,” explained Worth. He added that equity issuance fell in the first three quarters of 2023 as numerous REITs received blows from skittish investors during the 2023 regional banking crisis. 

Things are different in 2024. Non-at-the-market (ATM) issuance for U.S. REITs — equity issued day-to-day — reached $3.6 billion for common equity and $571 million for preferred equity in 2024, bringing the year-to-date total to $8.1 billion. At-the-market equity issuance — whose data usually trails non-ATM issuance by a full quarter because those shares sold must be registered with the Securities and Exchange Commission — hit $4.1 billion in the first quarter of 2024, and is likely to keep pace with the $19.3 billion in ATM-equity totals REITs raised in 2023. 

“We’re sitting at $8 billion in the first half of the year, and that compares to $11 billion in non-ATM for all of last year, so we’re actually seeing this year being a little more equity-heavy,” said Worth. “My expectation is at the end of the year there will be more equity issuance, ATM plus non-ATM, than we saw all of last year.” 

Because their income is paid out exclusively to shareholders, increased secondary debt issuance by REITs is likely to foreshadow a greater number of transactions, according to Worth, simply because the purchase of debt from borrowers allows REITs to finance deals.   

REITs issued $12.9 billion in secondary debt in the first quarter of 2024 and $12.4 billion in the second quarter, according to NAREIT. The consistent quarters of debt issuance have occurred amid interest rate stabilization. 

The federal funds rate has remained unchanged for 2024, sitting at 5.25 percent, while the 10-year Treasury has come down from cresting at 4 percent in late 2023. In turn, spreads on corporate debt have also fallen: The average yield to maturity (i.e. the interest rate on secondary debt) for REIT unsecured debt offerings fell to 4.5 percent in the second quarter of 2024, down from nearly 6 percent in the first quarter. 

“Debt issuance suggests we’re starting to see more transactions go on,” said Worth. “REITs came into a high interest rate environment with well-managed balance sheets, and that has given them the opportunity to be fairly aggressive in terms of growing, finding opportunities where higher leverage borrowers need to step out of the market or can’t bid on properties, and what we’ve heard from REITs is they’re excited to find value-add opportunities.”  

All told, the first quarter of the year saw U.S. REITs engage in $8 billion worth of acquisitions and $7 billion worth of disposition. Second quarter data is still forthcoming.  

However, mergers and acquisitions have remained infrequent, with the only major transaction of the year being Blackstone’s $9.2 billion purchase of Apartment Income REIT Corp. in June. 

By comparison, 2023 saw 11 M&A transactions, 2022 saw 10, and 2021 saw 16, according to Nariet data. 

“It’s not obvious to me why we’re seeing the dearth of M&A — it might be that a number of deals that made a lot of sense took place last year — but we’ll just have to see if we’ll see more activity,” said Worth. “Sometimes you go through periods when not much M&A is happening.”  

Brian Pascus can be reached at bpascus@commercialobserver.com