News Column

Fitch: REIT Bond Pricing Shows Going Green Pays

May 20, 2014



NEW YORK--(BUSINESS WIRE)-- The pricing of the inaugural U.S. REIT "green bond" could suggest being environmentally-friendly is also credit-friendly as highlighted by Regency Centers Corporation's (Regency, Issuer Default Rating [IDR]: BBB/Rating Outlook Stable) latest bond offering, according to Fitch Ratings. We believe the benefits of going green are not limited solely to broadening the creditor base, but also include increasing operational efficiencies, improving portfolio competitiveness and, over the longer term, reducing potential contingent liabilities.

The offering documents for last week's $250 million senior unsecured note issuance stated that proceeds would be used to fund, in whole or in part, eligible green projects. Importantly, the use of proceeds is not a structural mandate, but instead a best efforts commitment. The deal was priced at a 120-bpsspread to the benchmark Treasury, seemingly reflecting the inclusion of a broader investor pool with socially responsible mandates when comparing the pricing with the recent offerings for 'BBB+' rated Ventas, Inc. (April 10, 2014, 120 bps) and National Retail Properties (May 5, 2014, 132 bps), and relative to Regency's 'BB+' CDS Market Implied Rating being below its 'BBB' IDR.

Fitch believes as long as the supply of green bonds remains muted across corporates, REITs should have a sufficient number of green-eligible properties and projects to take advantage of the more favorable pricing. Even if green bonds were to become commonplace for REITs, they would likely become a catalyst to support the sector pricing closer to industrials, contingent upon green bonds remaining rare in corporates. While Fitch does not comment on bond pricing from a valuation perspective, structural changes in the cost and availability of capital are of critical importance to unsecured bondholders.

The "greenification of REITs" has been fast paced since it has been only 20 years since the U.S. Green Building Council was established and 15 years since the Leadership in Energy & Environmental Design (LEED) certification began.

Going green for real estate owners has gone from indifference (i.e. expectation that tenants would not pay premium rents for green buildings) to opportunity (e.g. Thomas Property Group'sThomas High Performance Green Fund) to becoming common place. Today, it has been integrated into many issuers' corporate brands as demonstrated by their stated focus on sustainability and social and environmental responsibilities in public filings, Web sites and focused reports.

Altruistic behavior by issuers is commendable, but only relevant to stakeholders when it affects recurring free cash flows. To date, we have seen issuers improve top-line growth and reduce operating expenses by going green. For example, Empire State Realty Trust (not rated) highlights the tangible benefits to prospective tenants when comparing headline rents with net occupancy costs.

Over the longer term, environmental inefficiencies have the potential to become a contingent liability for real estate owners similar to compliance with the Americans with Disabilities Act or asbestos removal. Being environmentally-friendly is voluntary currently, but that could change, much like how car fuel efficiency went from a selling point to a state and federal requirement for car manufacturers.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Britton Costa, +1 212-908-0524

Associate Director

Corporate Finance - U.S. REITs

or

Kellie Geressy-Nilsen, +1 212-908-9123

Senior Director

Fitch Wire

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Media Relations:

Sandro Scenga, +1 212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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