Fitch: Asset Sales Replace Shares as Cheapest REIT Equity Source

NEW YORK--(BUSINESS WIRE)-- Persistent discounted equity valuations for most companies have prompted REITs to favor property dispositions over share issuance in their investment funding strategies, according to Fitch Ratings. We expect asset sales to remain a hot topic for the foreseeable future given the arbitrage between private and public market real estate values. Indeed, the recent 11% net asset value (NAV) discount for public REIT shares has revived the popular slogan that real estate is "cheaper on Wall Street than Main Street."

Fitch expects U.S. equity REITs to continue mining their portfolios for dispositions through the balance of 2015 and into next year to upgrade portfolios, fund investments, and possibly improve credit profiles.

Asset sales provide funding at valuations in the private real estate market that generally exceed REIT's public market share valuations today. However, in contrast to issuing equity, the lost income from dispositions can cause leverage for REITs to tick up modestly, assuming any property-level debt is at or below the corporate average. Fewer assets also generally mean less diversification and there is risk of adverse selection in portfolio quality.

REITs are on pace this year to exceed last year's property sales record of $37 billion. Companies sold roughly $40 billion of properties during the trailing 12 months (TTM) ended Sept. 30, 2015 and Fitch expects stronger fourth-quarter sales volume this year. Office ($11 billion of dispositions), regional mall ($5 billion), and shopping center ($5 billion) REITs led the industry in dispositions for the TTM ended Sept. 30, 2015. The multifamily sector's share of dispositions should grow next year due to Starwood Capital Group's planned acquisition of $5.3 billion of apartments from Equity Residential (expected to close in 1Q16).

Fitch has not included over $20 billion of recently completed or announced REIT privatizations in the disposition figures above. Whole-company sales are not an alternative equity source to share issuance, but they are emblematic of the discounted valuations for REITs generally as well as the strong demand for commercial real estate from institutional investors, including private equity (PE). According to Preqin, PE real estate fund-raising totaled $86.9 billion in the first nine months of 2015 compared with $76.0 billion for the comparable 2014 period. Uncalled capital for real estate funds totaled of $255.4 billion in October 2015, up 30.1% from the end of last year.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Asset Sales Replace Shares as Cheapest REIT Equity (What U.S. REITs Are Saying)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874094

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View source version on businesswire.com: http://www.businesswire.com/news/home/20151207005958/en/

Fitch Ratings
Stephen Boyd, CFA
Director
U.S. REITs
+1-212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1-212-908-9123
or
Media Relations
Sandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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