March 19, 2015 8:27 p.m. ET
Real-estate investment trusts are scrambling to take advantage of investor demand for their high dividends by raising money in financial markets.
REITs have raised $12.25 billion through initial public offerings, convertible-bond offerings and follow-on offerings this year through Thursday, according to Dealogic. That is more than 3½ times the money that the group raised in the same period last year, though it is slightly below the money raised in that period in 2013.
Most of the volume of activity, about 80%, is coming from already-public companies selling additional shares.
REITs, which own properties such as commercial office buildings, residential apartments or warehouses, must pay out at least 90% of their taxable income to shareholders. As of Wednesday, the dividend yield on the FTSE Nareit Equity REITs Index was 3.35%, compared to a 1.84% yield on the overall S&P 500 stock index. Dividend yield represents how much an index or company pays in dividends relative to its share price.
This flood of issuance has been well-received by investors, despite the record-high stock prices and the looming threat of rising interest rates, which could lessen the lure of the dividends paid by REITs by making bonds more attractive.
REITs are the beneficiary of investors’ appetite for high returns at a time of persistently low interest rates both in the U.S. and abroad. Much of the demand for their offerings has come from investors who have put money into specialized REIT funds, who are then snapping up the newly issued shares.
In 2014, a record $12.4 billion flowed into U.S. real-estate mutual funds and exchange-traded funds, according to Morningstar. For the first two months of 2015, REIT funds took in $1.8 billion more.
“Flows have been quite positive, so investors have been happy to participate in these capital raises,” said Brian Jones, portfolio manager for the Neuberger Berman Real Estate Fund. He said his fund has participated in a handful of recent REIT offerings.
This year has had a number of large REIT deals, including a $2.5 billion follow-on offering and $1.4 billion convertible-bond offering by American Tower Corp. Also selling shares earlier this year in deals that raised nearly $2.8 billion combined were Health Care REIT Inc. and NorthStar Realty Finance Corp.
But, after a blockbuster 2014, some investors are wary that if the Federal Reserve starts raising rates later this year, REITs’ stock prices might suffer. In 2014, the FTSE Nareit Equity REITs Index returned 32.3%, including dividends, topping the S&P 500’s 14% return. For this year through Wednesday, the total return for the REIT index is 4.9%, compared to 2.4% for the S&P.
“We’ve had pretty much the same story every year with the concern that rates will rise,” said Matt Warren, head of real-estate equity capital markets at Bank of America Merrill Lynch, which has led multiple stock offerings by REITs so far this year. “Everyone is having a hard time predicting when that is going to be.”
REIT shares appear to have gotten a reprieve on Wednesday as the Fed signaled a more dovish approach to raising interest rates than investors had expected, suggesting demand for income-generating stocks won’t wane anytime soon. On Wednesday, the REIT index jumped 2.1%.
The heavy demand for new shares has led investors to pay a premium for additional stock offered by companies, a shift from the usual dynamic of companies selling new blocks of stock below their current share price.
So far this year, shares in follow-on offerings have sold at an average premium of 2.9% from the closing price before the offering was filed, according to Dealogic.
Fund managers say demand for the new shares has been supported by a positive outlook for REITs’ businesses beyond the ups and downs of bond yields.
“When REIT investors think about the operating environment for REITs, we see continued strength generally,” Mr. Jones said. “The fundamental picture for commercial real estate and REITs continues to be attractive.”
Write to Corrie Driebusch at [email protected]
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