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KBRA Publishes Research: REIT Credit Update: a Deeper Dive on REIT Private Placements
[January 18, 2019]

KBRA Publishes Research: REIT Credit Update: a Deeper Dive on REIT Private Placements

Kroll Bond Rating Agency (KBRA) has issued a new report, "REIT Credit Update: A Deeper Dive on REIT Private Placements."

The report makes the following key points:

  • Leverage for REIT unsecured borrowers remained near record lows as of September 30, 2018, with a median 32.6% debt-to-total market cap.
  • Median net debt-to-market leverage is considerably lower for REIT private placements (27.1%) than for public issuers (33.5%).
  • The minimum $300 million offering size required for eligibility within the Bloomberg (News - Alert) Barclays U.S. Bond Aggregate Index-representing 28% of private placement issuers' median total debt, a level of maturity concentration typically avoided by REITs-has deterred many companies from tapping the public market.
  • Private placements likely represent a more advantageous execution for mid-size REITs seeking right-sized offerings that match more granular funding needs, with the additional advantages of forward interest rate locks and delayed funding.
  • KBRA questions whether private placement yield premiums relative to public offerings reflect liquidity or credit risk. The smaller $4.0 billion median market cap and lesser portfolio diversification of private issuers does not otherwise detract from private issuers' lower leverage, higher percentage of unencumbered properties, more frequent equity offerings, and superior covenant protection.
  • REIT unsecured debt LTVs are but a fraction of median "look-through" LTVs for the most subordinate AAA classes of 2018 Conduit and Freddie Mac CMBS (46% and 55%, respectively). REITs could sustain a nearly 30% decline in total market cap and unsecured LTVs would still be lower than at-issuance levels for AAA Conduit.
  • REIT unsecured debt ratings appear too low relative to CMBS, a view corroborated by the growing number of REIT bonds that price tighter than AAA CMBS Conduit, and potentially relative to corporates with substantially weaker covenant protection.

To read the full report, please click here.

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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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