Most sectors have by now actively returned to the private bond market. However, real estate is still the one little piggy that stayed home.
REIT deals are back on the public market, but private placement investors still don’t seem comfortable with such issuers market participants said.
Granted, the much talked about Dividend Capital Trust (DCT), a REIT based in Denver, was able to tap the private market for $210 million via JPMorgan Securities and Deutsche Bank in April. The senior unsecured transaction, which priced in four tranches at 310 basis points and 317 basis points above Treasurys, impressed professionals in this market. However, despite being oversubscribed and the favorable result, REITs in general are not easy deals to get done under current market conditions, various sources say.
“Our market is not open to REITs yet,” said an agent familiar with the DCT deal.
DCT was watched closely. Yet, it might be too early to tell if the REIT’s success will be able to persuade similar issuers who may be interested in tapping the private bond market, said the agent familiar with the deal.
The success or failure of that REIT was one of the factors that could persuade similar issuers to tap the private market or not, said the agent familiar with the deal.
Real estate lost favor during the financial crisis and investors still view REITs “as neutral or negative,” said a second agent. According to Private Placement Letter’s Annual Buyside Survey, in 2009, the real estate sector ranked third from the bottom when it came to allocation. On average, investors only allocated $30 million to the sector. And when it comes to commercial real estate, lenders still wonder if the worst is truly over, the second agent said.
Despite private placement investors’ large appetite for new issuance, they still want to get paid more for investing in real estate, sellsiders concur. Spreads in this sector are wider than other comparable corporate bonds. The second agent described DCT pricing in the 300 bps above Treasurys range as “reassuring,” however, he pointed out that the deal was small and even though it upsized from $125 million, this was not a “dramatic increase in size."
The second half of the year will likely see the real estate sector bouncing back, a third agent said. Until then, the one or two REIT deals that get done will be difficult to execute. Other sellsiders believe it will take until next year for the sector to fully recuperate.
JPMorgan has yet to price its other REIT deal, California-based AMB Property. Market sources say the delay there is more about currency than anything else. Health and life insurance company Aflac is the only investor in this deal, various agents confirmed. The transaction will be in yen and will raise the equivalent of between $100 million and $150 million.
National Australia Bank and Bank of America Merrill Lynch are also preparing an Australian REIT deal, which they plan to launch in the near future, sources familiar with that deal said.