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U.S. Corporate Bonds (Feb 24-28): New Real Estate Listings Hit the Radar


Senior Market Analyst at Interactive Brokers

Investment-grade corporate bond sales are set to surge in the week ahead, as interest rates decline across the curve, and as the U.S. gears-up for Super Tuesday in the first week of March.

Deals in the week ahead, which may include a small lot of real estate investment trusts (REITs), could amount to roughly US$25bn, if market conditions remain sufficiently calm, after nearly US$37bn worth of fresh, high grade debt sales priced in the past week.

Ultra-low levels of U.S. interest rates have generally been spurring issuers’ desire to sell new bonds. To date in 2020, over US$240bn of fresh offerings have priced – a spike of around 26% more than the prior year period.

Rates have recently been depressed by flight-to-safety purchases of U.S. Treasuries, amid fears of the global spread of COVID-19, the deadly new coronavirus emanating from China, as well as slowing global growth, and heightened domestic political and governance risks.

Since the start of the year, yields across the U.S. Treasury maturity spectrum — from the 2-year note to the 30-year bond — have plunged between 24 basis points to 43 bps, with the 10-year note bid at 1.46% Friday — a 42-bp drop since January 2.

Meanwhile, the yield on the 2-year note again staged an inversion with the 5-year note, with levels in Monday’s pre-market trading at 1.285% and 1.244%, respectively. Also, the spread between the 2-year and 10-year yields has declined to its lowest level year-to-date, with a meagre 11-bp gap away from converging to zero.’s chief market analyst Patrick O’Hare recently noted that each of the past five recession periods since 1980 were preceded by an inversion in the 2y/10y spread. He pointed out that “the time between the first inversion and the start of the eventual recession averaged just over 18 months, with a range that spanned from ten months to two years.”

New Issue Spreads Deteriorate

Although issuance volumes of U.S. dollar-denominated corporate debt has reached massive levels, amid continued low-rate monetary policies, demand for the yield offered in the primary market appears unrelenting –  especially among those global bond investors who have been priced out of their local markets or have a dearth of available paper.

Refinitiv U.S. Lipper Fund Flows reported almost US$5.3bn having entered investment grade corporate funds in the week ending February 19, while market volatility-induced risk aversion spurred US$41m worth of outflows from high yield funds.

The turbulence in the global financial markets – mainly due to jitters about COVID-19 – has also pushed spreads wider on several deals completed in the past week.

According to Ron Quigley, head of fixed income syndicate at Mischler Financial, spreads on 33.25% of the 45 investment-grade new issues that priced last week tightened compared to their new issue prices (NIPs), while 57.75% widened and 9.00% traded flat.

REITs on the Radar: Tech & ESG Underscore Growth Strategies

Against this backdrop, a small lot of new high-grade bond sales have been spotted in the pipeline, including a handful of potential ‘BBB’-rated deals from REITs such as Mid-America Apartment Communities (NYSE: MAA), Piedmont Office Realty Trust (NYSE: PDM) and Healthcare Realty Trust (NYSE: HR).

Many REITs have recently been focused on evolving their business strategies, with heightened attention placed on emerging new technologies, as well as environmental, social and governance (ESG) concerns.

While e-commerce-related activity has generally hampered the growth of certain REITs such as Simon Property Group (NYSE: SPG), which owns malls where store closures have been growing more frequent – other areas within the CRE space have been exploiting their own digital strategies to evolve in the ever-changing environment.

Mid-America Apartment Communities (MAA), for example, which is involved in the ownership, management, acquisition, development and redevelopment of apartment communities in the Southeast, Southwest, and Mid-Atlantic regions of the U.S., has been expanding its technology platform, including implementing smart homes, with an aim to bolster net income growth (NOI).

Thomas Grimes, Mid-America Apartment Communities’ COO, said that the firm’s “overhauled operating system and new website has contributed to our ability to attract, engage and create value for our residents.”

It has also installed and tested smart home technology in 15 communities, apparently with minimal disruption, and has plans to significantly boost its roll-out in the year ahead.

“Our tests on smart homes have gone well,” Grimes said, amid expectations for an additional 24,000 smart home unit installations in 2020. He continued that the firm’s high-speed Internet access initiative is deploying and will be “a contributor to 2020 NOI growth,” while the REIT is also “exploring a range of AI chat, customer resource management and prospect engagement tools.”

For the quarter ended December 31, 2019, MAA posted net income of US$148.7m, or US$1.30 per diluted common share, more than double its US$60.4m, or $0.53 per diluted common share, in the same year-ago quarter. For the full year 2019, net income spiked more than 59.7% year-on-year to US$350.1m.

At year-end 2019, MAA boasted ownership interest in 102,104 apartment units, including communities currently in development, across 16 states and the District of Columbia.

Global advisory firm Deloitte recently said that technology-enabled facilities and personalized experiences are “already transforming the CRE industry, and the on-demand economy is reshaping tenant expectations,” as well as opening-up opportunities to raise operational efficiencies and lower costs.

Overall, they said the CRE industry has evolved from the traditional ‘location, location, location’ mantra to what is fast becoming ‘location, experience, analytics.’

Deloitte added that while the CRE sector is “not immune” to how macroeconomic concerns are impacting decision-making in the domestic and global economies – the industry is “on solid footing to attract capital” – particularly in the U.S. “If there is a downturn,” they said, CRE firm leaders will “likely need to weigh budgetary pressures against the need to make technology investments.”

To date, MAA’s shareholders seem satisfied with the REIT’s performance, with its shares up over 49.1% since its latest 52-week low set at the start of March 2019.

Office REITs Boost Sustainability Efforts

Meanwhile, Moody’s Investors Service recently assigned an investment-grade ‘Baa3’ credit rating to the preferred shelf program of Piedmont Office Reality Trust, with a stable outlook, based broadly on its “diversified portfolio of well-leased office assets” in select central business districts (CBDs), urban infill and suburban markets, as well as its “moderate leverage metrics and strong fixed charge coverage.”

The Atlanta-headquartered REIT is an owner, manager, developer, redeveloper, and operator of office properties, which are mainly located in select sub-markets within seven major Eastern U.S. office markets. It claims its almost US$5bn portfolio comprises around 17 million square feet.

Moody’s analyst Ranjini Venkatesan noted this past November that Piedmont Realty’s liquidity position was “adequate with stable cashflow from operations, high FAD [funds available for distribution] payout, higher than peer group utilization of its credit facility and a large unencumbered asset base.”

However, she said that an “aggressive dividend payout, sustained stock buybacks and consistently high utilization of the credit facility would weaken the REIT’s liquidity profile and the cushion on the stable rating outlook,” adding that Piedmont Realty has not accessed the public debt or equity markets over the last few years as proceeds from asset sales were used to acquire assets.

For Q4’19, Piedmont reported net income of US$162.5m, or US$1.29 per diluted share, up from US$45.4m in the same quarter in 2018, while for full year 2019, net income soared nearly 76% over the previous year to US$229.3m.

Moreover, Venkatesan added that energy efficiency and other sustainability initiatives are “an important component of office REIT’s operating strategy as many of their tenants are focused on the environmental footprint of their operations.”

To this end, over 60% of Piedmont’s portfolio at the end of Q4’19 was certified by Energy Star, an energy efficiency program run by the U.S. Environmental Protection Agency (EPA) and U.S. Department of Energy, while about 35% was certified by the Leadership in Energy and Environmental Design (LEED) green building program.

Shares of Piedmont were last trading at around US$24.08, an increase of roughly 25.32% from their latest 52-week low set in mid-August, and after accounting for a 1.35% plunge intraday Monday, amid heightened COVID-19 fears.

Investors will likely be watching for debt issuance from REITs to cross the wires, after MAA and Healthcare Realty Trust each complete fixed income investor meetings that reportedly began February 21, while Piedmont could come with a sale after its road show took place February 20.

In the meantime, use the global bond scanner in the IBKR Trader Workstation to locate corporate bonds that are available to trade in the secondary market, along with U.S. Treasuries, municipal bonds, non-us sovereign debt and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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