Office REIT BXP issues US$850m CB financing
BXP, the office property REIT formerly known as Boston Properties, made the unusual choice last week of prefunding a pending debt maturity with a convertible bond issue rather than straight debt.
Morgan Stanley, JP Morgan, Wells Fargo and Truist Securities priced the five-year CBs at a 2% coupon and 22.5% conversion premium, about midway of the 1.875%–2.375% coupon and 20%–25% conversion premium marketed. The office property REIT boosted its offering to raise US$850m, up from US$600m.
“[BXP] has been contemplating this financing for some time,” said one banker involved in the offering. “They looked at the interest expense arbitrage between an investment grade bond and convert and felt that the interest expense was sufficient to move ahead.”
BXP is the second REIT CB this year, after healthcare property REIT Welltower and data centre REIT Digital Realty raised a combined US$1.9bn.
Rated Baa3/BBB, BXP had plenty of funding alternatives, having issued an US$850m 10-year IG bond offering at a 5.75% coupon and with a US$700m 2.9% bond issue maturing in early 2030 (a little before the new CBs) trading at a 4.6% yield to maturity.
To achieve a similar fixed-income outcome, BXP spent US$29.8m of the CB proceeds on a capped call to offset dilution to premium share price. That works out to 3.5% of the base deal versus an average of 12% for most CBs.
Based on the money spent on derivative and 2% midpoint coupon pricing on the CB, the all-in cost works out to be about 3% annually.
Together with a drawdown on its revolving credit facility (5.17%), BXP is using the residual proceeds to prefund the US$1bn of 3.65% notes maturing in February 2026 and which can be called at par beginning November 3.
Because REITs pay out the bulk of earnings to shareholders in dividends, REITs lack the growth and volatility of a typical CB issuer.
“Some arbitrage guys are interested in this, but the majority of the book is long-only,” said the banker. “Investment grade credit funds have also looked at the deal.”
BXP has issued convertible bonds before, but a long time ago. In 2007, the REIT raised US$862.5m from the sale of CBs at a 2.875% coupon and 20% premium to its share price at the time.