Firm Capital's $20M Financing: A Strategic Move for Non-Traded REIT Growth?

The non-traded REIT sector has entered a period of cautious optimism, with fundraising surging to $2.08 billion in Q1 2025-the first time since Q2 2023 to exceed $2 billion, according to a BlueVault Partners report. Against this backdrop, Firm Capital Mortgage Investment Corporation's $20 million bought deal financing stands out as a strategic capital-raising move. The offering, which includes 5.50% convertible unsecured subordinated debentures due 2032, reflects broader trends in REIT capital efficiency and growth strategies while highlighting the sector's nuanced approach to debt and equity allocation.

Unlocking Growth Through Hybrid Financing

Firm Capital's $20 million financing, led by CIBC Capital Markets and TD Securities, involves convertible debentures priced at $1,000 per unit, with an over-allotment option potentially boosting proceeds to $23 million, according to a J.P. Morgan analysis. The debentures, convertible at $14.06 per share, offer a balance of fixed-income stability and equity upside-a structure increasingly favored by REITs in a high-interest-rate environment. This aligns with broader market trends: U.S. REITs raised $22.5 billion in Q2 2025, with $16.3 billion from debt offerings, reflecting a 5.5% average yield to maturity, according to a ConnectCRE story.

The use of convertible debt allows Firm Capital to avoid immediate equity dilution while maintaining flexibility. By earmarking proceeds for debt repayment and general corporate purposes, the company signals a focus on capital efficiency-a critical priority as refinancing pressures persist. This mirrors the sector's broader shift toward debt as a primary funding tool, with REITs prioritizing refinancing and selective acquisitions over equity raises, as noted in a Goodwin Law briefing.

Capital Efficiency in a High-Yield Environment

The decision to issue convertible debentures rather than traditional equity underscores the sector's emphasis on capital efficiency. Convertible bonds, as hybrid instruments, offer REITs a cost-effective way to raise capital while preserving shareholder value. According to J.P. Morgan, REITs are projected to see FFO growth of 3% in 2025, rising to nearly 6% in 2026, driven by stable fundamentals and improved capital market liquidity. However, the success of such strategies hinges on disciplined capital allocation.

Firm Capital's financing, for instance, avoids the immediate dilution risks of equity offerings while providing a conversion feature that could benefit shareholders if the stock price appreciates. Yet, the debentures' non-redeemable status until 2028 introduces long-term liability considerations. This aligns with the sector's broader trend of leveraging long-term debt to manage refinancing cycles, particularly in industrial and healthcare real estate, where selective buying has accelerated, as observed in the Goodwin Law briefing.

Broader Sector Implications

The non-traded REIT sector's fundraising momentum-up 23% quarter-over-quarter in Q1 2025-suggests growing investor confidence in REITs' ability to navigate high-rate environments, according to BlueVault Partners. Firm Capital's $20 million raise, though modest compared to Blackstone Real Estate Income Trust's $822.8 million, exemplifies how smaller players are leveraging hybrid instruments to optimize capital structures.

However, the effectiveness of such strategies depends on the quality of growth initiatives. Academic research highlights that REITs using convertible debt for "good growth" (e.g., high-quality acquisitions or refinancing) see positive shareholder reactions, while "bad growth" (e.g., overexpansion) erodes value, as shown in the Good growth, bad growth study. Firm Capital's focus on debt repayment and corporate purposes suggests a conservative approach, which may appeal to risk-averse investors but could limit upside potential.

Conclusion: A Prudent Step in a Shifting Landscape

Firm Capital's $20 million financing reflects a calculated approach to capital efficiency in a sector increasingly reliant on debt. By leveraging convertible debentures, the company aligns with broader REIT trends of balancing cost, flexibility, and growth. Yet, the long-term success of this strategy will depend on how effectively the proceeds are deployed-and whether the market continues to favor REITs' ability to navigate refinancing challenges. As non-traded REITs collectively raise record sums, the focus remains on disciplined capital allocation, a lesson Firm Capital's move underscores.