Fitch: Recent US REIT Spinoffs Benefit Unsecured Bondholders

Spinoffs by US real estate investment trusts (REITs) will benefit unsecured bondholders by enabling issuers to focus on core holdings and improve strategic simplification, according to Fitch Ratings. Bond prices have risen for major REITs that have announced spinoffs.

Four notable transactions include: the announced spinoff by Simon Property Group, Inc. (NYSE: SPG) of its smaller malls and strip centers to Washington Prime Group, Inc.; the completed spinoff by Starwood Property Trust (NYSE: STWD) of its single-family rentals and nonperforming loans to Starwood Waypoint Residential Trust; the announced spinoff by American Realty Capital Properties, Inc. (NYSE: ARCP) of its multi-tenant shopping center portfolio to American Realty Capital Centers, Inc.; and the announced spinoff by NorthStar Realty Finance Corp. (NYSE: NRF) of its asset management business to NorthStar Asset Management Corp.

The spinoff by SPG, the largest US equity REIT by market capitalization ($84.7 billion as of Dec. 31, 2013), is expected to close in 2Q14. The transaction should improve SPG's asset quality as evidenced by higher mall occupancy (96.5% pro forma compared with 96.1% as of Dec. 31, 2013) and higher tenant sales per square foot ($616 pro forma compared with $582 as of Dec. 31, 2013). This spinoff solidifies SPG's strategy of owning and operating larger malls, The Mills, and Premium Outlets, as well as international investments. Simon Property Group, L.P.'s $600 million of 3.375% notes due 2022 priced on March 8, 2012 and traded at a price of 98.4% of par both prior to and following the spinoff announcement on Dec. 13, 2013. The spread on these bonds tightened modestly from 76.4 basis points (bps) prior to the announcement to 75.7 bps following the news.

The spinoff by STWD, the largest US commercial mortgage REIT ($29 billion of assets under management), of Starwood Waypoint Residential Trust (NYSE: SWAY) closed on Jan. 31, 2014. SWAY's portfolio consists of a single family residential segment including approximately 7,200 units of single-family homes and residential non-performing mortgage loans. This spinoff will allow STWD to focus on its target assets, including commercial real estate mortgage loans with loan-to-value ratios ranging from 50% to 80% instead of various commercial real estate property segments, CMBS and RMBS across the credit spectrum, and other commercial real estate-related debt investments. STWD's most recently issued corporate obligations, $400 million 4% convertible senior notes due 2019, were priced on June 28, 2013. These bonds traded at 106.6% of par prior to the spinoff announcement on Oct. 31, 2013 and at 108.5% of par following the announcement.

The spinoff by ARCP, the largest US net lease REIT ($21 billion enterprise value post-spin) of its power and shopping center business was announced on March 13, 2014. This spinoff should allow ARCP to focus primarily on single-tenant, freestanding commercial real estate properties primarily subject to net leases. On Feb. 6, 2014, ARC Properties Operating Partnership, L.P. and a wholly owned subsidiary issued $2.55 billion of senior unsecured notes in a private placement, including $500 million 4.6% senior notes due 2024. These bonds traded at 99.7% of par prior to the spinoff announcement on March 13, 2014 and at 100.9% of par following the announcement.

This spinoff by NRF ($8.3 billion total equity market capitalization as of Dec. 31, 2013) of its asset management business was announced on Dec. 10, 2013 and is expected to close in 2Q14. The spinco, NorthStar Asset Management, will also manage NRF's non-traded REIT business and own its broker-dealer platform. NRF will retain flexibility to invest in real estate, senior or subordinate loans, as well as opportunistic CRE investments both in the United States and internationally across all commercial property types. NorthStar Realty Finance Limited Partnership issued $300.0 million of 5.375% exchangeable senior notes on June 19, 2013 in a private placement. These bonds traded at 108.1% of par prior to the spinoff announcement on Dec. 10, 2013 and at 125.1% of par following the announcement.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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