Regency Centers Corp. received significant press for being the first U.S. real estate entity to issue green bonds. The $250 million offering, completed in May 2014, consisted of 3.75 percent 10-year senior unsecured notes due in June 2024. Since then, Vornado and Digital Realty Trust have followed suit with green bond offerings of their own. To help capital market participants originate or invest in this new category of green real estate bonds, GRESB (Global Real Estate Sustainability Benchmark) recently released Green Bond Guidelines for the real estate sector.
Based on the growth in this sector, I wanted to get some insight from Regency on the development of their green bond offering, and how the funds have been used. The company released a Green Bonds Use of Proceeds & Management Report, detailing the use of net proceeds. Funds were used for eligible green projects, as defined in the prospectus supplement, including seven LEED Certified centers and two in-process developments seeking LEED certification. I recently interviewed Mark Peternell, vice president of sustainability with Regency Centers, for more background on this program, and what he sees next in the green bonds space.
In early conversations about issuing green bonds, did you face resistance from stakeholders, and if so, how did you address?
There wasn’t a lot of resistance at all. Given that we were the first U.S. real estate company and the second U.S. corporation to issue Green Bonds, we spent a lot of time educating ourselves and our stakeholders. Things like: how they function, how to structure our issuance/use of proceeds and potential benefits.
When you considered ways to use the funds, were other green metrics considered besides LEED certification? If so, how did you come to the decision to use LEED as the guideline?
We felt strongly from day one that LEED certification was a necessary component. It provided a framework from which to measure the environmental performance of the investments, and since LEED is administered by an independent third party we felt it established credibility the SRI investors would require. We considered incorporating provisions for other energy and water conservation projects not associated with LEED certification, but ultimately decided that it added unnecessary complexity and lacked third-party verification.
You reported that you engaged in outreach to socially responsible investors, and got participation from 80 percent of that target group. Can you share more about that outreach process, and how it differed from a traditional Regency bond offering?
Prior to the issuance we hosted a sustainability update that provided investors an opportunity to learn more about Regency’s sustainability story. Regency has established itself as a sustainability leader and we wanted to show how that standing provides us a long-term competitive advantage. The story resonated and it was a great way to engage new investors.
When the bonds were issued, did you have a good sense of what the demand would be, or were you pleasantly surprised?
We expected strong demand for the bonds given the overall market conditions, but we were surprised how much of the overall demand came from dedicated SRI investors, including several accounts that hadn’t previously invested in Regency. However, not all of the demands for the bonds was from the SRI crowd, and several of our traditional fixed-income investors purchased the bonds.
Vornado and Digital Realty have followed your lead in issuing green bonds. What do you anticipate the growth of this market to look like? What are some of the challenges that will need to be faced?
As the market matures I think we’ll see the number and scale of issuances increase, and this will drive socially responsible investors’ thresholds for environmental performance and reporting even higher. We believe we set a high standard with LEED certification, as well as relying on independent third parties to verify the environmental performance of our developments, and attest that the funds raised were allocated in accordance with our use of proceeds statement.