What Are the Debt Trends for Nontraded REITs?
September 28, 2018 | James Sprow | Blue Vault
With the Federal Reserve announcing interest rate increases recently, it’s perhaps a good time to look at the trends in both the debt utilized by nontraded REIT programs and the cost of that debt. We examine some data from Q2 2017 and Q2 2018 and find the following:
The total assets for all REITs in the Q2 2017 increased year-over-year by 7.4%. Of that increase in total assets, virtually all is due to the entrance of Blackstone REIT into the industry. Without the increase in assets due to the entrance of Blackstone, the total assets for all other nontraded REITs would have decreased year-over-year by 1.0%. It’s important to note that real estate assets are depreciated each year under GAAP, and for REIT portfolios that are relatively stable year-over-year, the book value of the portfolios will decrease under accounting principles by roughly 3%, other things equal. Also, if cash distributions relative to cash flows from operations are relatively equal, there will be little or no change in assets year-over-year due to the REIT’s net cash flows.
The total debt used by all nontraded REITs to finance their assets increased 13.0% year-over-year. However, adjusting once more for the entrance of Blackstone REIT, total debt used by all other nontraded REITs increased only 1.8%. Along with the increase in debt, average debt ratios also increased from 49.8% to 52.4%. Without Blackstone REIT the average debt ratio would have increased to just 51.2%.
Nontraded REITs have increased the use of fixed-rate debt. The percentage of all nontraded REIT debt that was at unhedged variable rates went from 40.2% down to 38.3%, year-over-year. Nontraded REITs utilize swap contracts to effectively hedge the rates on their variable rate debt. The amount of hedged variable rate debt in nontraded REIT financing increased 8.8% year-over-year.
Finally, with the rise in interest rates that has been the trend since Q2 2017, the weighted average interest rates of all nontraded REIT debt financing have increased from 3.71% in Q2 2017 to 4.00% in Q2 2018, an increase of 29 basis points. (This rate is calculated using the debt of each nontraded REIT to arrive at a weighted average for the industry.) Of the 53 REITs that reported a weighted average cost of debt (interest rate) for both Q2 2017 and Q2 2018, 44 REITs reported an increase in their weighted average cost of debt and just nine reported a decrease. (Ten-year Treasury yields have increased from Q2 2017 to Q2 2018 from 2.31% to 2.85%, or 54 basis points.)
Sources: SEC, Blue Vault
