One of the many differentiators for public REITs is their ability to tap the bond market, which has become a substantial source of capital. Last year, REITs raised $48.1 billion through secondary debt issuance, up significantly from $29.4 billion in 2023.
Nareit data show year-to-date debt issuance totaled $25.2 billion through the second quarter, with the average yield to maturity for REIT unsecured debt offerings at 5.5%. REIT deals in the market are often in demand due to limited supply and issuance typically represents less than 2.5% of the overall bond market. For 2025, analysts are expecting a decline in REIT debt issuance, noting that the sector is not deploying capital as fast as originally expected.
REIT.com recently talked with analysts to hear more about how fixed income investors view REITs as part of their investment strategies, how REITs can better tell their credit story, and more. Roundtable participants included:
- Kevin McClure, executive director at Wells Fargo Corporate & Investment Banking
- Ryan Shelley, REITs & insurance analyst at BofA Securities
- Bill Stafford, managing director at US Bancorp Investments Inc.
- Mark Streeter, managing director at J.P. Morgan
Who are REIT fixed income investors and how are they using REITs as part of their fixed income or overall investment portfolio strategy?
Kevin McClure: The REIT fixed income community is broad and includes investors following a number of different strategies, but safe to say, the investor base skews heavily toward long-only, domestic investors. The long-duration nature of the asset base makes REITs attractive to life insurance companies, but asset managers are also important players in the market.
It’s a tiny sector with a lot of names that normally trades wide of the investment grade index, and funds that dedicate the time and resources to covering it are often rewarded with additional yield and spread.
Most REIT investors are spread-based investors that measure performance based on excess return, so this additional yield and spread helps enhance portfolio excess returns. The track record of the sector has been strong too, and covenants, which are uncommon in the investment grade market, add another layer of protection.
William Stafford: Today, it’s really a solid mix of traditional insurance company–more buy and hold–investors and total return managers. The market has really evolved over 25-plus years. While it remains a small part of the overall investment grade benchmarks, the sector has provided a good source of excess returns over time versus broader industrials and other similarly rated corporate issuers.
How do investors view REITS in the current environment from a fixed income perspective?
Ryan Shelley: Generally, REITs remain more in demand just given the lower relative supply over the last few years versus pre-rate-hike cycle in 2022. Additionally, given REITs are generally higher in quality, I think they remain in demand as investors try and pick names that are more resilient and have less foreign exposure given the turbulent macro climate.
Mark Streeter: Long-term investors love REIT bonds because they hardly ever default. We’ve only had a tiny number of equity REITs default over the last 20 years—the default rate is less than 1% of all-time outstanding REIT bonds.
The definition of a BBB credit rating for a cohort of bonds over a 10-year period is inherently supposed to exhibit default probabilities of between 3% and 7% based on cohort and time. We have never seen that level of REIT defaults, yet the industry is still predominantly rated BBB.
So, there’s a big disconnect between how the rating agencies assess this risk. They call most of these bonds BBB, yet at the end of the day, they act more like single A credits. For that reason, investors, especially insurance companies that are managing very long-duration liabilities, want long-duration assets, and they want assets that don’t default.
McClure: Most investors are constructive on the sector, but with spreads nearly back to the February (pre-tariff) tights, much of the “juice” has already been squeezed. Office remains topical, as there is still good yield on offer in the subsector, and a couple of story credits have potential catalysts. There is also a wider dispersion of views on credit risk going forward that make for some interesting debates. But, overall, credit fundamentals look fairly healthy across the REIT sector.
How do REITs compare from a value perspective to debt or other types of fixed income assets?
Stafford: Absent a wholesale economic recession, fundamentals remain firm. REIT balance sheets continue to largely be in their best shape for the last 25 to 30 years and should be able to withstand a shallow recession.
Shelley: REITs broadly trade in line with the overall market. That being said, I think you could argue that REITs trade rich given they tend to have more locked-in revenue, strong balance sheets, etc.
Streeter: Most of the BBB REITs are trading on top of to slightly tight to the BBB alternatives in other sectors, so they don’t scream cheap, and they don’t scream very rich. If you fundamentally believe that a lot of these REIT BBB bonds really are closer to single A bonds, then ratings over time will rise and then these BBB REIT bonds do screen cheap. But if you’re in alignment with the rating agencies, you can argue the value is fair currently.
How has the current interest rate environment impacted investors’ fixed income strategies and/or investor expectations related to REITs?
McClure: Rates remain elevated, and that means yield-based investment strategies are popular with fixed income investors. Credit spreads, while important to our investor base, only represent roughly 15% to 25% of the coupon on a given new issue, so issuers have become more rate-sensitive in this environment and are timing their offerings accordingly. This means investors need to be nimble, recognizing that market windows will open and close as they always do, but that open windows may not last as long as in years past if rates are volatile.
Shelley: Given that issuers now have to pay higher coupons, REIT issuance has slowed to the bare necessity, given a slower transaction market and higher financing costs. Additionally, prepayment of outstanding unsecured debt has slowed given the lower coupons many REITs are still sitting on from 2021 to 2022. Investors understand this, but given the lack of supply, most new REIT deals in the market are often in demand due to scarcity of available paper.
Streeter: REITs are not deploying capital as fast as we thought they would be at the beginning of the year. They have not acquired as much, and therefore, we’ve actually reduced our REIT bond issuance forecast. We were expecting $42.5 billion this year, and we’re now down to $35 billion. The total investment grade issuance this year is going to be $1.5 trillion, so this level of REIT bond issuance represents basically less than 2.5% of the overall market. That’s very manageable, and that’s pretty consistent with where REIT bonds outstanding are relative to the size of the market.
We’re watching how interest rates are impacting REIT stocks; how they’re impacting the ability for REITs to issue equity; how acquisitive they’re going to be; how that flows into how much REIT bond supply we’re going to have; and just in general, how investors are feeling about the health of the commercial real estate market.
What do fixed income investors want in the current market?
McClure: Fixed income investors want excess return and therefore look for inflection points in credit stories that could change trading relationships or drive absolute spread compression.
Shelley: Today, fixed income investors are looking to trade into higher quality REITs given that many of them trade at similar levels. Investors are looking to invest in REITs that they think will prove more resilient in the event of another sell-off.
Stafford: It’s hard to say that investors are really chasing yield in the current market. The spread between BBB- and BB-rated corporate debt remains rather compressed. What we’re watching most closely is the continued growth of private credit and what the implications of that might be long term for both investment grade and high yield corporate spreads.
How is the current high rate environment impacting how REITs are positioning themselves with fixed rate investors?
Shelley: Given the higher coupons investors are demanding, REITs are likely not issuing as much as they were during say 2021, when rates were much lower. As a result, they are being up front with investors that interest costs will likely grow slightly over time.
McClure: Generally speaking, REITs have always done a good job with investor outreach. Over the past couple of years, we have noticed an uptick in CEO engagement at our meetings, and we believe that is a good thing. Fixed income investors appreciate time with management, and hearing directly from the key decision-makers helps inform their credit opinions.
Streeter: Interest rates are not what’s driving how REITs are communicating to investors. They’re communicating their unique credit stories and where their leverage sits. We’re interested to see how many REITs look to do convertible debt to save on the refinancing friction that we have right now. That’s one thing they’re articulating to investors, but a lot of what REITs are communicating is around sources, uses, and where they sit with their leverage targets and their conversations with the rating agencies.
How are REITs doing in terms of cultivating long-term partnerships with fixed income investors and is there room for improvement?
Stafford: This has been a long, long educational process, but most REITs have been very successful in building and keeping up relationships with the right side of the balance sheet. In any business that needs continual access to capital, you can’t only focus on equity investors and expect to post consistent long-term results. Fixed income investors are accustomed to a deep level of contact and disclosure and the effort from management teams has generally been helpful.
Shelley: REITs overall do a good job of investor outreach; they are generally more available than other sectors. Additionally, disclosure of financial statistics is generally strong across the space.
Streeter: Most investment grade corporate bond issuers don’t have the specific financial covenants that REIT bonds offer investors. So, REIT bonds afford investors a level of protection that other corporate borrowers don’t get. What we’ve seen over time is that most REITs now disclose on a quarterly basis the actual levels against those four covenant ratios.
Not every REIT that issues bonds provides those disclosures so there is room for improvement for those that aren’t disclosing their quarterly covenant ratios. I just heard from a REIT that was upgraded from high yield to investment grade that they’re now going to disclose their covenant ratios going forward. I was very happy to hear that, and we’re still pushing the holdouts to disclose their covenant information. But the level of disclosure we get from REITs is exponentially better than the disclosure I get from the credits I cover in other sectors.
Can you share any notable best practices of REITs that have built successful strategies for engaging with fixed income investors?
Stafford: A number of REITs, particularly in multifamily and increasingly in retail, provide separate fixed income focused quarterly supplements. My peers and I have also been pushing for more update calls outside of the standard REITweek and other industry gatherings for those names that are topical— in office, for example. I’ve also started hosting an annual visit to a specific MSA with multiple issuers for fixed income investors only, which is something that usually has been reserved for equity investors.
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