A surge in REIT green bond issuance is providing further proof of the growing appetite for sustainable initiatives from REITs and demand for green investment products on behalf of investors.
According to market analysis from S&P Global Market Intelligence, REITs had raised $7.17 billion from green bond issuance year-to-date through Sept. 9 compared to the $8.1 billion raised in all of 2020. It also is notable that more REITs are dipping a toe in the water and exploring green bonds. Five of the nine REITs that 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 that activity goes hand-in-hand with REITs ramping up their ESG initiatives, but the other part seems to be tied to REITs discovering the appetite of investors for those type of securities,” says Chris Hudgins, REIT Data Journalist, S&P Global Market Intelligence.
U.S. REITs also are tapping into the global investor demand for green bonds. For example, Realty Income priced its debut green bond issuance in July with a Sterling-dominated offering that ultimately raised £750 million total ($877.35 million), which included £400 million of senior unsecured notes due in 2027 and £350 million of senior unsecured notes due in 2033. Combined, the new issues had a weighted average term of approximately 8.8 years and a weighted average yield to maturity of approximately 1.48 percent. 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 key driver behind the green bond issuance is the company’s increased focus on ESG. “At Realty Income, the last three years have been characterized by an increased external stakeholder engagement on environmental and social performance, as well as an increased momentum related to our ESG initiatives,” says Sumit Roy, CEO and president of Realty Income. The REIT plans to use proceeds from the offering to finance or refinance new and existing eligible green projects in the categories outlined in the company’s Green Financing Framework.
“We are partnering with clients across our 6,700+ property portfolio to identify properties for various upgrades and improvements, such as energy efficiency with LED lighting systems, HVAC upgrades, water efficiency systems, EV charging stations, solar, etcetera,” says Roy. Realty Income also has had a robust investment pipeline this year with about $4.5 billion in acquisitions volume expected in 2021. Those acquisitions include opportunities to buy green buildings.
REITs tap into appetite for green investments
Green bonds account for a growing part of the overall market for U.S. REIT debt offerings. The $7.17 billion in year-to-date offerings represents 16.4 percent of total capital raised through U.S. debt offerings, which is ahead of the 10.3 percent level recorded in 2020 and on track for an all-time high, according to S&P Global Market Intelligence.
Green bond issuance in the U.S. REIT sector has been fueled by a variety of factors. First and foremost is an increase in investors looking to put their capital into sustainable-oriented investments. “We have seen an increase in investors and funds looking to invest more heavily, or some even solely, in companies that are ESG-cognoscente,” says Hudgins. Ultimately, that is widening the potential buyer pool for REIT securities. Not only has this resulted in some REITs achieving a slightly favorable price reduction on issuing the debt, but the bigger benefit for the REIT is giving it another avenue to promote its ESG efforts, and potentially attract new investors, he adds.
“There is a flood of capital coming 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, there is a need for this type of capital because there is such a focus on improving carbon footprints of portfolios. Common use cases are things such as adding solar panels to properties to increase their renewable energy usage, implementing water conservation techniques and overall reducing carbon emissions at the property. “Thus far, issuers are finding ample opportunities to put this incremental capital to work,” says Bragg. REITs also may find slightly favorable pricing benefits from green bonds, but those benefits are borderline negligible, he says.
One downside to green bonds is limiting the flexibility in which the REIT can utilize that capital, as it must deploy it strictly to ESG-related initiatives. However, REITs have been very smart thus far in regard to both the timing of their green bond issuances, as well as what they are earmarking the proceeds towards, notes Hudgins. In most cases, proceeds from green bonds are earmarked for either recently completed development properties that have achieved sustainability certifications through programs like LEED or Energy Star, or are used for specific planned future developments or renovations. REITs that issue green bonds also need to show investors that the capital raised has in fact been spent on green projects. “Those that have utilized green bonds to date already provide robust reporting of their ESG initiatives, but I could see that being a hesitation for some, especially smaller REITs that might not have the same resources as their larger peers,” says Hudgins.
Will green bonds become mainstream?
Views are mixed on just how far green bonds could push into mainstream REIT financing. “Generally speaking, I think we are still in the early stages of growth in demand for green capital markets activity, whether it is on the equity or debt side,” says Bragg. It is likely that green bond issuance will progress over time across the spectrum 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 into green buildings to make the most meaningful environmental impact, notes Roy. “However, we do not believe 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 use of green bonds in the future will be driven by its eligible green projects pipeline. “Based on how active our investment pipeline currently is, especially in Europe and partnerships we are building with our clients on the ESG front, we expect the opportunity set of eligible green projects to grow, which we expect will support the growth of our portfolio that could potentially be financed with green capital,” says Roy.
Green bonds have seen constant growth over the past three years with a wider range of REITs across different property types from housing to data centers that have successfully completed offerings. “I wouldn't be surprised to see more REITs utilize green bonds in the future, as moving towards sustainability seems to be a growing trend in the sector,” says Hudgins. “That being said, green projects are just one slice of the pie for REIT capital uses, and REITs will always need other forms of capital to support their operations.”
