Real estate firms are raising billions in debt and equity. Here’s why

CoStar is selling $1.25B in stock, Zillow is raising $1B

Rich Barton, Howard Lorber, Jay Hennick, Brett White
Rich Barton, Howard Lorber, Jay Hennick, Brett White

As the economy starts to re-open, real estate players are hungry for cash.

On Tuesday, CoStar said it would sell $1.25 billion worth of stock, becoming the latest in a half-dozen companies seeking to shore up their balance sheets with new debt and equity.

In the past week, commercial brokerage Cushman & Wakefield said it’s selling $400 million in senior notes. Colliers International, Zillow and Vector Group — the parent company of Douglas Elliman — are also in the market for new capital.

“As long as the capital markets are still open and money is flowing on the debt and equity sides, companies want to position themselves in such a way that they can get through whatever might occur,” said Yousuf Hafuda, a Morningstar analyst who covers real estate stocks. He said the Fed’s fiscal stimulus has stabilized the market in general, but there is still a wide range of potential outcomes.

For CoStar, which already had $1.9 billion in cash on its balance sheet, the offering strengthens its position as it seeks additional acquisitions.

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“They are still exposed to the overall commercial real estate industry, which is experiencing difficulties,” said Hafuda. “But I think they’re definitely one of the companies positioned to do well. Their competitive position is just so strong.”

Similarly, Zillow had $2.6 billion in cash on its books before announcing a $1 billion offering of stock and convertible notes. The listing giant hinted at future acquisitions, but it also said it planned to resume home-buying, a capital intensive business it suspended during the outbreak. “We are beginning to see our passing lane,” CEO Rich Barton said during a May 7 earnings call.

Byron Carlock, head of real estate at PricewaterhouseCoopers, said federal intervention in the economy won’t last forever. “There’s a defensive desire to be prepared if this pandemic comes back in the fall,” he said.
Fueled by interest rates near zero, many companies are turning to the debt market. “Debt is as cheap as we’ve seen it in our lifetime,” Carlock said.

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Corporations issued $265 million in debt between March 11 and April 27, compared to $108 billion a year prior, according to data firm Intelligize.

Meanwhile, investors with cash have been eager to pounce on opportunities in hard-hit industries, including travel. “Cash is at a premium right now,” Jim Woolery, head of M&A and corporate governance at law firm King & Spalding LLP, told the Wall Street Journal.

For some companies, extra cash may be necessary to fund operations.

Vector, which raised $52 million by selling common stock, earmarked the proceeds for “general corporate purposes.” But in its most recent quarterly report, the company said it doesn’t expect its real estate business to generate positive cash flow this year due to Covid-19. (Its tobacco business will be cash flow positive.)

Park Hotels and Resorts, which is offering $500 million in senior secured notes, said it would use the proceeds for general corporate purposes and to pay down a fully-drawn $1 billion credit line.

For Colliers, which is offering $200 million in convertible notes, there are previously-announced deals to consider. The company said it will use proceeds to repay a portion of its credit facility, which “will then be available to be drawn, as required, for working capital, acquisitions and associated contingent purchase consideration and general corporate purposes.”

Stephen MacLeod, an analyst at BMO Capital, noted that Colliers is expected to close this year on Dougherty Financial Services and Maser Consulting. Those acquisitions give Colliers “compelling growth prospects,” he wrote in a May 19 research note.

Cushman & Wakefield, meanwhile, described its $400 million offering of senior secured notes as an opportunistic move.

The commercial brokerage had $1.4 billion in liquidity on its balance sheet at the end of the first quarter, with “ample liquidity and a diversified revenue base” to fund operations through a downturn, CEO Brett White said during a May 8 earnings call.

In a statement, a Cushman spokesperson said, “We have determined this [is] an opportunistic time to raise capital at a price that’s advantageous to the company.” Cushman reported net income of nearly $7 million during the first quarter of 2020, down 70 percent year over year. Revenue was flat at nearly $1.9 billion.