REITs continue to embrace green bonds
An increase in REIT green bond issuance provides further evidence of the growing appetite for sustainable REIT initiatives and investor demand for green investment products.
According to S&P Global Market Intelligence market analysis, REITs had raised $ 7.17 billion through green bond issuance since the start of the year through September 9, compared to $ 8.1 billion. dollars raised in 2020. in the water and explore green bonds. Five of the nine REITs that have issued green bonds so far this year are new entrants, including AvalonBay Communities Inc., Equinix Inc., Healthpeak Properties Inc., Realty Income Corp. and Vornado Realty Trust. “Part of this activity goes hand in hand with strengthening ESG initiatives by REITs, but the other part seems to be related to REITs discovering investor appetite for these types of securities,” says Chris Hudgins, journalist REIT, S&P Intelligence data from the global market.
US REITs are also tapping into global investor demand for green bonds. For example, Realty Income priced its first green bond issue in July with a pound-dominated bid that ultimately raised a total of £ 750million ($ 877.35million), including $ 400 million. million pounds sterling of senior unsecured notes due 2027 and 350 million pounds of senior unsecured notes. Notes due 2033. Together, the new issues had a weighted average term of approximately 8.8 years and a weighted average yield to maturity of approximately 1.48%. The order book included both existing and new investors, including ESG-focused investors, which allowed Realty Income to further diversify its investor base.
Like many REITs, a primary driver of green bond issuance is the company’s increased focus on ESG. “At Realty Income, the past three years have been characterized by increased engagement of external stakeholders on environmental and social performance, as well as increased momentum related to our ESG initiatives,” said Sumit Roy, CEO and President of Realty Income. The REIT plans to use the proceeds of the offering to finance or refinance new and existing qualifying green projects in the categories described under the Company’s Green Funding Framework.
“We are partnering with clients from our portfolio of over 6,700 properties to identify properties for various upgrades and improvements, such as energy efficiency with LED lighting systems, HVAC upgrades, water efficiency systems, electric vehicle charging stations, solar power, etc. Roy said. Realty Income has also had a strong investment pipeline this year with an acquisition volume of approximately $ 4.5 billion expected in 2021. These acquisitions include opportunities to purchase green buildings.
REITs harness appetite for green investments
Green bonds represent a growing share of the global market for US REIT debt offerings. The $ 7.17 billion in offers since the start of the year represent 16.4% of total capital raised thanks to US debt offers, which is above the 10.3% level recorded in 2020 and on track. reach an all-time high, according to S&P Global Market Intelligence.
The issuance of green bonds in the US REIT sector has been fueled by a variety of factors. It is above all an increase in the number of investors seeking to invest their capital in investments oriented towards sustainable development. “We have seen an increase in the number of investors and funds seeking to invest more heavily, if not only, in companies that are ESG-cognoscente,” explains Hudgins. Ultimately, this expands the pool of potential buyers for REIT securities. Not only has this allowed some REITs to get a slightly favorable price cut when issuing debt, but the greater benefit to the REIT gives it another opportunity to promote its ESG efforts and potentially attract new investors. new investors, he adds.
“There is an influx of capital into the ESG space, both on the equity and debt side. So there is a high level of demand, agrees Dave Bragg, co-head of strategic research at Green Street. For the issuer, this type of capital is necessary because of the focus on improving the carbon footprint of the portfolios. Common use cases are things like adding solar panels to properties to increase their use of renewable energy, implementing water conservation techniques, and reducing overall carbon emissions on the property. property. “So far, issuers have found plenty of opportunities to leverage this additional capital,” says Bragg. REITs can also reap benefits from slightly favorable green bond prices, but those benefits are almost negligible, he says.
One of the drawbacks of green bonds is that it limits the flexibility with which the REIT can use this capital, as it must deploy it strictly for ESG-related initiatives. However, REITs have been very smart so far about both the timing of their green bond issuance and the allocation of revenue, notes Hudgins. In most cases, green bond proceeds are allocated either to recently completed development properties that have achieved sustainability certifications through programs such as LEED or Energy Star, or to specific future developments or renovations. REITs that issue green bonds must also show investors that the capital raised was in fact spent on green projects. “Those who have used green bonds to date already provide strong reporting on their ESG initiatives, but I could see that this was a hesitation for some, especially the smaller REITs who might not have the same resources as theirs. more important peers, ”says Hudgins.
Will Green Bonds Become Mainstream?
Opinions are divided on the extent to which green bonds could fit into traditional REIT financing. “Overall, I think we’re still in the early stages of growing demand for activity in green capital markets, whether it’s on the equity or debt side,” Bragg said. Green bond issuance is likely to grow over time across all areas, from seasoned issuers to other new entrants and perhaps smaller REITs, he adds.
In the REIT industry, green bonds are a well established instrument as they allow issuers to invest the proceeds in green buildings to have the most significant environmental impact, notes Roy. “However, we do not believe that green bonds will become mainstream as not all issuers are prepared and able to follow the rigorous guidelines and ongoing reporting requirements to highlight progress towards sustainability / ESG goals and key green projects completed, he adds.
For Realty Income, its future use of green bonds will depend on its portfolio of qualifying green projects. “Based on the current activity of our investment pipeline, particularly in Europe and the partnerships we are building with our clients on the ESG front, we expect the set of eligible green project opportunities is growing, which we believe will support the growth of our portfolio that could potentially be funded with green capital, ”says Roy.
Green bonds have grown steadily over the past three years with a wider range of REITs across different types of properties, from housing to data centers successfully completing offerings. “I wouldn’t be surprised to see more REITs using green bonds in the future, as the move towards sustainability appears to be a growing trend in the industry,” says Hudgins. “That being said, green projects are only a piece of the pie for REIT capital uses, and REITs will always need other forms of capital to support their operations.”