Still in Office

Source: SNL Financial, 434-977-1600,

Source: SNL Financial, 434-977-1600,

By Agha Nawazish Ali Khan

Since REITs are required to distribute 90 percent of their taxable income to shareholders to maintain their status, it becomes quite challenging for them to build capital reserves. Hence, capital markets serve as an important source to generate additional funding for acquisitions and ongoing operations.

Year-to-date through July 1, office REITs led the sector with $3.37 billion raised through common equity offerings. Three office REITs—BioMed Realty Trust, CommonWealth REIT and Alexandria Real Estate Equities—each raised more than $500 million through their respective offerings, with BioMed Realty Trust leading the way at $668.6 million. The company used the net proceeds to partially fund the recent acquisition of Wexford Science & Technology L.L.C., which will now operate as a wholly owned subsidiary of Biomed Realty. Owing to an improving economy as well as a decline in unemployment rates in the past 12 months, the outlook for office REITs in general is on the uptick. As of July 3, they provided investors with a 16.2 percent median one-year total return, outpacing the 14.4 percent median return for all U.S. REITs.

Healthcare REITs ranked second with $2.89 billion raised through common equity offerings year-to-date through July 1. Health Care REIT raised a towering $1.69 billion during the period, expecting to use the net proceeds to reduce indebtedness and for general corporate purposes, including investing in healthcare and seniors housing properties. The triple-net-lease structure and the long-term nature of healthcare leases—often between 10 and 15 years—has historically provided investors with stable returns largely unaffected by economic trends. Healthcare REITs posted a median total return of 16.4 percent for the one-year period ending July 1, besting the median return for all U.S. REITs by more than six percentage points.

The self-storage REIT sector raised $52.5 million via common offerings, the lowest aggregate year-to-date through July 1. Sovran Self Storage and CubeSmart were the only two companies to raise capital through common equity issuances, with the former taking the lion’s share with its $50.9 million offering. Historically, one of the sector’s biggest challenges has been oversupply, but with the lack of new development activity in the self-storage space, occupancies as well as rental revenues can be expected to further strengthen. The median one-year total return by self-storage REITs at 38.3 percent bested the total for all U.S. REITs by 24 percentage points.

— Agha Nawazish Ali Khan is a real estate research analyst for SNL Financial L.C.