Publicly traded real estate investment trusts have come back to the capital markets this year to raise new funds, a sign that REIT stock and debt offerings are in favor again with investors.
The $64.9 billion in total fundraising through the first three quarters has already exceeded the full amounts raised in each of the past two years, according to new data from the trade group Nareit.
Retail REITs accounted for the most money raised through the first three quarters, bringing in $6.93 billion. Single-tenant retail REIT Realty Income took $2.33 billion of that total. Data center REIT Digital Realty Trust though had the highest total raised by an individual REIT with $2.63 billion.
REITs typically raise money by issuing stock or debt notes to investors. A recent focus on debt has been driven by an anticipated further decline in interest rates, David Auerbach, chief investment officer of Hoya Capital, told CoStar News.
REITs take in cash to finance projects and buy properties to expand their portfolios. They aim to pay most of their earnings through dividends to shareholders. Lower rates tend to have a positive impact on REITs, industry analysts say, raising earnings and dividends.
The idea of lower rates “pushed a lot of the debt issuance through,” Auerbach said. The Federal Reserve cut rates by a half-percentage point last month, prompting some investors to "realize that hopefully the sun is coming up on the other side here and that's why REITs are being proactive,” he said.
The inflow of capital has yet to show up in new property purchases, as most of the money has come from those debt offerings, according to Nareit.
“Issuing debt is more attractive to REITs now than it was a year ago,” John Barwick, Nareit’s vice president of index management and industry information, said in an email to CoStar News.
With renewed access to capital markets, Nareit expects REITs to be in a position to raise acquisition capital through equity offerings as the property transaction market regains its footing.
Favorable market
Over the past year, the 10-year Treasury yield has declined from nearly 5% in October 2023 to about 4% now, Barwick noted. The benchmark is the interest rate the U.S. government pays to borrow money for a decade and helps the Fed determine monetary policy.
“When combined with the September rate cut and the potential for further cuts, the market for debt issuance is extremely favorable for REITs — particularly given their well-structured balance sheets,” he said.
As of the second quarter, publicly traded REITs had a debt-to-asset ratio of about 34.1%, according to Nareit.
“With such disciplined balance sheets, REITs can be considered advantage players in the commercial real estate marketplace and investors are taking notice,” Barwick said.
Year to date, the $40.8 billion raised through secondary debt offerings is significantly higher than the $23.9 billion raised during the same period in 2023. Notably, debt issuance rose 24% quarter over quarter for a total of $15.4 billion in the third quarter, compared to $2.7 billion in the third quarter of 2023.
The issuance of new common stock and preferred shares though has yet to rebound as strongly from the two previous years. Equity issuance is $16.7 billion year to date, up from $12.2 billion for the same period last year.
Public REITs were among the first to see their stock values fall from the Fed’s aggressive rate-hiking cycle starting in 2022. Now, as the pendulum begins to swing back the other way, the sector is just beginning to be positioned to reap the benefits of outperformance, according to Nareit.
REIT stock prices this year have already been outperforming the Dow Jones Industrial Average. Another measure, the Financial Times Stock Exchange Nareit All Equity REITs Index, rose 3.2% in September, besting the broader stock market as the Dow Jones U.S. Total Stock Market and Russell 1000 each rose 2.1%.
The All Equity REITs Index rose 16.8% in the third quarter and is up 14.2% on a year-to-date basis.
“As equity prices continue to improve, we’re more likely to see REITs issue more equity,” Barwick said.
New REITs
While equity offerings were down through the third quarter, the public REIT sector saw its first two new initial public offerings in more than two years — accounting for more than half of the equity total raised year to date.
This summer, Lineage, the world's largest cold storage provider by capacity, completed an IPO, raising $5.1 billion. FrontView REIT, with a headquarters office in Dallas, raised $251 million from its completed IPO in September.
The fourth quarter has already seen the addition of another new REIT, though it was not an IPO. Retail REIT Site Centers completed its spinoff of Curbline Properties into an independent publicly traded company with a portfolio of roughly 80 convenience centers.
Despite the increase in new capital, new REIT property acquisitions have been muted with REITs selling more properties than they have acquired this year, according to CoStar data.
Public REITs participated in $30 billion in property sales through Sept. 30 this year, while acquiring just $25.6 billion. That compares to $26.3 billion in sales in the first three quarters of 2023 versus $33.6 billion in purchases.
Part of the cooling comes from the lack of mergers and acquisitions. Only one REIT M&A deal has been announced and completed in 2024, with a value of $9.2 billion, according to Nareit data. This stands in contrast to 2023, which saw six publicly listed REIT deals of more than $1 billion each, according to CoStar data.