The Recapitalization of the Commercial Real Estate Sector Continues and Markets Evolve
- More high coupon credit and preferred equity is being called
- Much of the activity is immediately accretive
- Narrowing of supply and demand brings markets back to normalcy
- Opportunities are still available, but might not be for long
In September we highlighted some examples of the refinancing/recapitalization frenzy that was occurring all across the REIT sector. The trend continues.
On December 4th, Getty Realty (GTY), a small-cap owner of gas station/convenience stores announced the issuance of $175MM 3.43% ten-year notes via a private placement. They will use the proceeds to fully redeem $100MM 6.0% Series A senior unsecured notes due February 25, 2021. This is good and timely balance sheet management that reduces annual interest expense by $2.57 MM and effectively adds $0.06/share to earnings.
Medical Properties Trust (MPW), the largest owner of hospitals in the United States, on 11/19/2020 announced the issuance of $1.3 Billion of 3.50% Senior Notes due March 2031. A portion of the proceeds will be used to redeem $300MM 5.5% Senior Notes and $500MM 6.375% Senior Notes, both due 2024.
MPW has already closed more than $3 billion in property purchases in 2020, so we anticipate that this blend and extend refinancing was done to create balance sheet flexibility in addressing their huge acquisitions pipeline. MPW has assets in North America, the UK, EU, and recently entered Latin America.
BlueRock Residential Growth (BRG) is an NYC multi-family residential REIT with a growing portfolio of properties in the most desirable Sun Belt sub-markets. With the COVID 19 inspired migration out of NYC and San Francisco, BRG finds itself in the current sweet spot for real estate investment, but their lopsided capital structure leaves them hamstrung. They have too much debt and an outsized stack of very expensive preferred equities.
In October BRG redeemed a portion of their 8.25% Series A preferred stock and on November 19 announced they would redeem an additional 47% of the shares outstanding. Buying back high-cost capital is the prudent thing to do, but in BlueRock’s case, with 6-8% coupon preferreds valued at nearly 3x their common equity, there is little margin for error in attempting to correct their upside-down cost of capital vs. investment opportunity.
Preferred Apartment Communities (APTS) faces a capitalization dilemma very similar to that of BRG. When 2MC tried to address the illogic of their excessive, expensive issuance of 6+% coupon, un-listed preferred in meetings with management in 2018 and 2019, then CEO, now Executive Chairman, Dan Dupree, described that it was very difficult to achieve the access to funding through the network of independent broker/dealers and that APTS was reluctant to abandon it. He simultaneously explained the uneconomic prospects of a 6%+ cost of capital for a 5%- cap-rate investment in multifamily acquisitions; he reasoned that the high cost of capital warranted the shift to investment in higher cap rate acquisitions in grocery-anchored retail, office, and student housing.
APTS shares exceeded $22 in November 2017, but after the careless, seemingly limitless issuance of high coupon preferred stock and an egregiously overpriced internalization of management earlier this year, shares fell to $5.01. Multifamily residential has ranked as a higher-performing subsector within the realm of REITs; APTS’ underperformance is truly scandalous.
On 11/19/2020 APTS announced the simultaneous approval of an accelerated redemption calendar of preferred share redemptions and a $208MM preferred share redemption. Prudent move. Too little, too late.
Gladstone Land Corporation (LAND) is at the heart of one of our favorite asset classes, triple net leased agriculture. LAND common is fully valued; LAND preferreds are a simultaneous opportunity and risk.
LANDP is a 6.375% coupon preferred with a mandatory redemption looming on 09/29/2021; trading at north of $26 holders face a 4% haircut next September.
LANDO is a newly listed 6.0% coupon preferred trading at a small discount to par.
If someone owns LANDP, they might do well to sell it for a premium price and plow the proceeds into the discounted LANDO.
On November 23rd Annaly Capital Management (NLY), the largest government agency mREIT, announced the redemption of all outstanding shares of their 7.50% Series D preferred stock ($460,000,000!). Mortgage REIT common and preferred shares declined the most in March’s market selloff and the mREIT preferreds have been slower to recover than their equity REIT preferred peers. Annaly’s move demonstrates that it has access to lower-cost capital and the share prices of their other preferred series have begun to melt up to par value.
Market Normalcy Returns
As billions of high coupon debt and equity are called, demand for yield will exceed the diminished supply. Discounts will shrink and shares will trade at the premiums they enjoyed pre-pandemic. Good values can still be found but they won’t be around forever.
Notes and Disclosure
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