Publications
Alert

Recent REIT Initial Public Offerings

Real Estate Update

As a result of the financial crisis and the dislocation of the credit markets, is there renewed interest in newly formed REITs?

In the last 18 months, there have been 15 REIT IPOs: nine in 2009 and six through June of 2010. The six REIT IPOs this year have raised over $1.1 billion. The REIT IPO pipeline for the remainder of 2010 indicates increased demand.1 The increased demand for REIT IPOs is justified by both liquidity and other structural benefits provided by REITs.

Some investors have grown frustrated with open-end private funds that have far less liquidity than REITs. After all, the liquidity of most private fund vehicles is only as good as the liquidity of the underlying properties. The financial crisis showed that certain investors were not prepared for the risk of illiquidity of private real estate funds with high direct property investments. In early 2009, investor redemption requests spiked and forced the majority of open-end private funds to halt redemptions. In contrast, liquidity in the REIT market has grown significantly and while liquidity in the private market slowed during the recent financial crisis, significant liquidity for REITs was sustained.2 This is attractive to investors.

Selling individual properties has also proved difficult and inefficient. Scarcity of financing, troubled assets and a higher probability of deals not going through to closing has led to yet more frustration. Contributing properties to a new REIT is a sales strategy being discussed more and more.

Despite increased liquidity and stronger historic performance, REITs currently account for only 5% of U.S. corporate and public pension real estate allocations, amounting to roughly $12 billion of the $252 billion such pensions invest in real estate.3 Cohen and Steers concludes that as a result of the financial crisis, many institutional investors may change their real estate allocations and increase their investments in listed real estate over time.4 And Sellers may conclude that a REIT IPO may be their best way to unload properties and obtain new capital.

But, not so fast. Welsh Property Trust recently delayed its IPO; it originally planned to raise more than $300 million which would have ranked it as the largest REIT IPO so far in 2010.5 No REIT IPOs were completed in May (more than 30 companies worldwide shelved their IPOs in May and June), which is certainly a reflection of broader market volatility. Given market concerns over Europe’s debt crisis, such market conditions create another level of uncertainty that makes an IPO even riskier.6 Certainly, no one relishes having to pay the costs of a failed IPO or the stigma that can attach by reason of that failure.

The U.S. IPO market, however, may be recovering. There are some recent signs of renewed optimism. Hudson Pacific Properties, an office REIT with properties in California, raised $218 million in late June.7 The share price of $17 was within Hudson Pacific’s proposed price range of $17 to $19.

So, there are valid reasons for more REIT IPOs during these tough times and beyond. But market concerns are having a strong chilling affect on the decisions to go that route. Stay tuned.

  1. See Clay Risher, Real Estate Offered Up, Real Estate Investment Today, May/June 2010.
  2. See id. at 10.
  3. See id. at 11.
  4. See Burl Gilyard, REIT Place, Wrong Time? Welsh IPO On Hold, Finance & Commerce, June 5, 2010.
  5. See Inyoung Hwang & Michael Tsang, IPOs Derailed by Market Plunge as Americold, Ryerson Shelve Initial Offers, Bloomberg News, May 7, 2010, available at http://www.bloomberg.com/news/2010-05-07/ipos-derailed-by-market-plunge-as-americold-ryerson-shelve-initial-offers.html.
  6. See Kristin Sholer and Inyoung Hwang, Hudson Pacific Raises $218 Million in IPO of Office REIT; Shares Advance, Bloomberg News, June 24, 2010, available at http://www.bloomberg.com/news/print/2010-06-24/hudson-pacific-raises-218-million-in-reit-ipo-at-bottom-of-price-range.html.

Notice: The purpose of this newsletter is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. The Advisory should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.