Ask anyone which group of multifamily real estate owners is armed with the best arsenal for buying and development apartments, and the answer is easy: the publicly traded REITs. And one of the ways these firms have been able to generate the dry powder necessary for their activity has been ATMs, or at-the-market, stock offerings.
The ATM, which is a continuous equity offering, allows REITs to release a certain number of shares into the marketplace when their stock hits a price that’s desirable. Under a normal offering, a REIT offers a fixed number of shares at a set price. Analysts say the ATM is attractive because without having to pay certain fees, it costs about 1.5 percent versus up to 5 percent for other types of equity raises.
“They view it as low-cost alternative to raising equity in the marketplace,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York.
And while the practice doesn’t directly affect private owners, REITs are often using these offerings to generate money for acquisitions, which, of course, affects the greater transactions market. “The last wave of equity issuances were opportunistic,” St. Juste says. “Now they’ve gone out and raised some equity to finance acquisitions.”
Though ATMs, with their ability to generate equity at a low cost, have obvious appeal to REITs, some analysts still have questions. Their key issue is transparency: “The ATM is dribbling out everyday or it could be every couple of weeks,” says Paula Poskon, a senior research analyst with Milwaukee-based Robert W. Baird & Co. “You don’t know when the company is doing it versus the approach of actually launching an offering and marketing it and pricing it all at once.”
It also makes it harder for analysts to project exactly how a REIT is doing if they keep issuing stock. “Clearly, the granular use of ATMs diminishes FFO per share visibility because you never know what your denominator will be,” Poskon says. “So from that sense, from the salea side, we tend to not like them as much because it makes your forecasting less accurate.”
Some also wonder if buy-side firms who often get a 7 percent to 10 percent discount under normal trades (but don’t under ATMs) don’t have other motives for their opposition to ATMs, as well though. The uncertainty of ATMs also make it harder for analysts to accurately predict performance.
Not everyone agrees that ATMs are cause for concern. "They are predominantly being used to match fund the equity portion of acquisitions, and to pay off maturing debt or re-equitize balance sheets," explains Andrew McCulloch, an analyst at Green Street Advisors, a Newport Beach, Calif.-based research firm. "Some people are negative on them because of less transparency, but I would argue that is more than offset by the cheaper issuance costs and better control by management over the process. Plus ATMs limit dilution from low-yielding cash sitting on the balance sheet. I do not believe that they are a bad thing for shareholders if used responsibly."
St. Juste, for one, thinks the market will ultimately rein in those companies who are overusing ATMs. “I think most of these companies understand that the market is taking a very keen eye of how they’re using the capital,” he says. “They understand that how they deploy it is something that shareholders take very seriously.”
And with more buying and developing opportunities materializing, the industry might want to brace itself for more ATMs.
