Earlier this year, analysts braced for equity offerings from companies across the REIT sphere. And in many sectors, that happened. Except, that is, in the apartment market, which has shied away from cash-generating activities thanks to relatively easy access to agency debt.
“Among the apartment REITs, you only saw Camden raise equity. It surprised me that other multifamily REITs did not also issue,” says Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O'Neill + Partners. “I think you’ll see more tap the equity markets to de-lever and maintain unencumbered pools, but there's no question the apartment REITs benefit from their access to Fannie and Freddie debt.”
Instead of doing one big equity raise, such as Houston-based Camden Property Trust’s $285 million offering in May, a number of apartment REITs, including Alexandria, Va.-based AvalonBay Communities; Palo Alto, Calif.-based Essex Property Trust; Birmingham, Ala.-based Colonial Property Trust; and San Francisco-based BRE, have lined up what analysts call “slo-mo” deals. Basically, the REITs set aside an amount of stock to sell over a period of time, provided they like the price.
“This is an attractive way of raising equity [much less costly and risky than marketed deals],” says Simon Wadsworth, CFO for Memphis, Tenn.-based REIT Mid-America Apartment Communities. “We used this technique to raise $100 million in new equity last year and have said publicly that we may use it to raise a limited amount this year, if the acquisition environment justifies it.”
Colonial, which will issue up to $50 million, will issue up to 20 percent of its stock traded on a given day, provided the transaction meets its price criteria. “They can be more opportunistic and act more like a sharp shooter,” says Andrew J. McCulloch, an analyst for Green Street Advisors, a Newport Beach, Calif.-based consulting and research firm. “When they feel like the price is right, they can pull the trigger quickly.”
It also helps that stock prices are going up. “A program likes this works while the stock market is rising,” says Jerry Brewer, executive vice president of finance for Colonial. “You don’t have to put undue pressure on your stock to dilute the value of it on any given day.”
Though REITs are getting their money over a greater period of time thanks to longer-term offerings, they still aren’t selling at a discount. “The advantage to us is that with a typical overnight equity or a marketed equity offering, the investors will want a discount to the closing price,” Brewer says. “With this program, you are issuing at current market price. You don’t have that additional discount.”
And with the money, they can reel in cash to pay down debt and push back maturities. “Most of the companies have their revolving lines of credit and are just paying that down so they are able to take advantage of any opportunities in the future,” Brewer says.