Funds, REITs Eye IPOs for Capital

LOS ANGELES-Earlier this summer, locally based Colony Financial Inc. filed a registration statement for a $500 million IPO. This organization, experts tell GlobeSt.com, is one of many REITs and opportunity funds that will tap the public markets for liquidity to buy distressed and other assets during the next 12 to 18 months.

Ernst & Young’s Howard Roth with the company’s New York City office points out the market hasn’t seen a flood of fund and REIT public offerings. Nor has Craig Silvers, who is president of Bricks & Mortar Capital, which operates on the other side of the country, in Los Angeles. But both agree that it’s coming.

“Right now, we’re seeing a raft of registrations for mortgage REITs,” Roth says. “During the past six weeks, we’ve seen close to 25 registrations. This is clearly a trend right now. And it’s clearly an avenue that sponsors believe they can take advantage of.”

Registrations, of course, don’t necessarily mean automatic initial public offerings. Silvers points out that the opportunity funds are definitely being formed to buy distressed assets. Whether they go public or not is a different matter. But it’s becoming a viable alternative.

“In the real estate market earlier this year, a lot of private companies got into trouble,” Silvers says. “The private ones had to liquidate their assets and declare bankruptcy because they couldn’t raise private capital.” However, funds and REITs going public “can tap the public markets for cash whenever an acquisition opportunity comes up,” Silvers remarks.

Roth points out that the benefits of going public include better access to capital and stronger discipline when it comes to accounting, operations and management. Then there is the transparency issue in that investors would know what they’re getting into when they put their money in the stock.

But it’s the equity situation that seems to appeal to these funds and REITs. If a large portfolio comes along that makes sense, Silvers says, the public fund can sell its stock to raise funds and have instant liquidity for a buy.

“To do anything in real estate these days requires a lot more equity than what you had at the height of over-leveraging and the CMBS market,” Roth adds. The question right now is how much equity is required, however. “There haven’t been a huge amount of transactions just yet,” Roth remarks. “Folks have to get a sense of how much equity is required, how it will impact returns and how much debt financing is actually available.” As a result, he remarks, some of these funds and REITs could officially go public later this year and well into 2010.

Despite the number of registrations, Silvers predicts that fund and REIT IPOs will be a trickle at first. “If a few come out and do well, some time down the road, we’ll see a big wave of these,” Silvers comments. “People want to test the waters with a few.” However, he adds, if the early ones absorb $5 billion to $6 billion, there won’t be a lot left for anyone else.

This leads to another question; namely, will the public pay enough to buy the stock to make going public worthwhile. A source in Dallas who is working with funds that may go public points out that the public appetite for what he dubs as “well-heeled, solid real estate owners” is growing, too. “The investors would have the opportunity and ability to invest in organizations, who have the capital to grow their portfolios in 2010 and through 2012,” the source remarks. “And the investors will be paid dividends while they’re waiting.”

But going public isn’t a panacea, nor is it applicable for every fund or REIT. Silvers believes that mortgage-backed securities, for example, are best for public capital raises, as well as those funds interested in buying larger real estate portfolios.

The Dallas source explains REITs that can recoup loses in the market and relatively new funds interested in distressed assets would be good candidates for going public as well. But “if you have way too much debt and the majority of your portfolio was bought between 2004 and 2007, you’re in a different scenario,” the source adds.

However, in an environment in which funds are forming to buy distressed or other types of assets, and REITs requiring more for their war chests, a public offering may be a logical route. “The public vehicle is a way in which these funds can replenish their capital base,” Roth says.