REIT Revival

The U.S. housing market may still be struggling, but the market for real estate investment trusts has begun to show signs of life. “The REITs have clearly been seen as survivors and will be major participants in acquiring assets — and maybe companies,” asserts Mitchell Hersh, president and CEO of Edison, New Jersey–based office REIT Mack-Cali Realty Corp.

The stock prices of equity REITs — which take ownership in their properties, either commercial or residential — took a beating in late 2008, sapping investors’ appetite for such offerings. On top of the overall slide in the markets, the high levels of unsecured debt and maturing loans on the trusts’ balance sheets made REIT investors antsy.

But early this spring a few REITs tested the equity waters, and investor response was positive. Simon Property Group, the largest public U.S. real estate company, was one of the first out of the gate. The Indianapolis-based REIT, which invests in shopping malls, came to the market on March 20 with a $543.4 million offering. Its stock price jumped nearly 60 percent over the following weeks, as the group took in an additional $1.15 billion in a second offering on May 7.

Mack-Cali Realty raised $287.5 million on May 1 “at a reasonably good price [$25 a share] and with minimal dilution,” says CEO Hersh. The company used the cash to repay corporate borrowings and pay down a credit facility.

“It enhanced the balance-sheet capacity and allowed us to feel sanguine about debt maturities,” Hersh notes, adding that the capital injection lowered the Mack-Cali REIT’s ratio of debt to undepreciated book value by 5 percentage points, to 37 percent.

In total, according to Sheila McGrath, an analyst at New York’s Keefe, Bruyette & Woods, existing U.S. REITs raised $12.6 billion in equity offerings from March 18 through June 9, compared with just $1 billion in the preceding four months. Traditional investors in the category — including mutual funds, pension funds and insurance companies — have reentered the market, becoming the main driver behind the recent spurt in activity. And it’s paying off for them. These investors were given the option of purchasing a large portion of REIT shares, collectively as much as 80 percent in some cases, before the offerings were brought to market, at an average discount of 8.5 percent, says McGrath. The REITs posted returns of 15.3 percent from mid-March through early June, on average, outperforming the MSCI US REIT index by more than 600 basis points. “We expect that we’ll be looking at this [upturn in offerings] over multiple years,” McGrath says.