Mortgage REITs Competing in IPOs Meet Tepid Reception (Update1)
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By Hui-yong Yu
Oct. 2 (Bloomberg) -- Real estate investors trying to leverage initial public offerings to buy distressed commercial property debt are using a flawed strategy, said James Corl, a managing director at New York-based Siguler Guff & Co.
“Generally speaking, floating a bond portfolio as a public company is simply not a sustainable business model,” said Corl, whose firm manages $9 billion. “Bonds don’t grow; they are a fixed-income investment.”
Corl spoke in an interview this week before New York-based Ladder Capital Realty Finance Inc., formed to buy commercial mortgages as default rates rise, canceled its IPO. The company was set to follow Apollo Commercial Real Estate Finance Inc. and Colony Financial Inc. into the public markets, with Ladder seeking $400 million. Both Apollo and Colony cut their offerings by half last month and are now trading below their listing price.
Another mortgage buyer organized as a real estate investment trust, Foursquare Capital Corp., last week also postponed its initial share sale.
Some mortgage REITs struggle to generate consistent revenue and earnings growth, according to both Corl and Ritson Ferguson, chief investment officer of Radnor, Pennsylvania-based ING Clarion Real Estate Securities, which manages about $12 billion.
Real estate investments trusts that buy mortgages often borrow too much when their borrowing costs are low compared with what they can earn on loans, then find their profits eroded as short-term rates rise relative to long-term rates, Corl and Ferguson said.
ING’s Perspective
Since May, at least 13 investors and money managers, including Barry Sternlicht, the founder and chief executive officer of Starwood Capital Group LLC, have filed to raise money through public offerings of mortgage REITs. The companies aim to capitalize on forecasts that banks will unload commercial and residential property loans at distressed prices.
“There is an opportunity as a lender in the market right now,” said Ferguson. “As of yet, we haven’t necessarily found the right combination of management skill, alignment and pricing that’s been compelling to us.”
Apollo Commercial Real Estate and Colony Financial have both fallen in New York trading since going public.
Apollo Commercial, a New York-based REIT set up by Leon Black’s Apollo Management LP, cut its stock sale to 10 million shares from 20 million and expected net proceeds of $198 million. Colony Financial, a Los Angeles-based REIT created by Thomas Barrack’s Colony Capital LLC, reduced its offering to 12.5 million shares from 25 million and raised $250 million.
Tepid Response
“The tepid response is due to multiple concerns,” said Ferguson. He called the companies “blind pools with no existing investments; as such, they aren’t worth the issue price at the time of offer and so really won’t go up until the money is put to work.”
Shares of Starwood Property Trust Inc. fell as low as $19.06 in August after the company sold shares to the public for the first time on Aug. 12 at $20. The shares fell 2 cents to $20.01 today. CreXus Investment Corp., which went public on Sept. 9 at $15, rose 5 cents to $14.20 in New York Stock Exchange composite trading today.
The Bloomberg REIT Mortgage Index fell 55 percent after paying dividends during the past five years, whereas the broader Bloomberg REIT Index gained almost 4 percent. The mortgage REIT index has risen 14.8 percent including dividends during the past 12 months. Annaly Capital Management Inc. has the biggest weighting of the 25 companies in the mortgage REIT index.
Since 1991, 54 mortgage REITs have sold shares to the public, according to the National Association of Real Estate Investment Trusts in Washington D.C.
“They blow up every decade,” said Corl. “They are generally spawned as fee generators for the parent, are rife with conflicts and don’t represent a true embracing of the public market ethos.”
To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net.
Last Updated: October 2, 2009 17:47 EDT |
