Several large investment firms are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market, and more are on the horizon.
The planned IPOs, which include units of firms like Apollo Management and Alliance Bernstein Holding LP, could be just the beginning of what some bankers expect to be a boom in Real Estate Investment Trusts (REITs) going public over the next few years.
The U.S. commercial real estate market has been reeling ever since a prime source of financing, the commercial mortgage-backed securities (CMBS) market, virtually closed and banks shut off their lending spigots in the past year.
In the real estate world, the next few years will be defined by a lack of capital, said Michael Knott, a senior analyst with Green Street Advisors.
According to a recent Deutsche Bank report, as much as $40 billion will be needed to salvage about $420 billion of CMBS mortgages maturing over the next 10 years.
More recently, the sector has grappled with falling rents and rising vacancies driven by the recession.
The dislocation in the real estate and CMBS markets has prompted several top investment firms to create REITS that will aim to buy up, manage and originate commercial real estate loans.
As assets start to come on the market and distress in commercial real estate increases, REITs will be the buyer of choice, and they will get bigger and bigger, said Brad Smith, managing director for equity capital markets at Bank of America Merrill Lynch.
With significant amounts of mortgages coming due in the next three years, there will be demand for loans that traditional players such as banks have been unable or unwilling to make.
In the past two months alone, eight REITs have filed for IPOs seeking to raise up to $3.9 billion, a larger pipeline than that of traditional IPOs, according to Thomson Reuters.
For instance, an affiliate of private equity firm Apollo Management last week filed for a $600 million IPO to take advantage of what it called a void of several hundred billion dollars that must be filled by new mortgage lenders.
The newly formed companies were set up as REITs, a tax structure that exempts companies earning most of their revenue from either rent or mortgages from paying taxes on their taxable income if the company distributes 90 percent of that to shareholders.
TOXIC BUT INVITING
Other leading investment firms are trying to raise money to create REITs that will buy bad loans or CMBS, referred to as toxic assets, on the cheap from the U.S. government.
Newly formed REITs affiliated to asset managers AllianceBernstein and Angelo Gordon & Co have in the past week applied for large initial public offerings in an effort to buy so called toxic assets under a U.S. government program. The AllianceBernstein affiliate is looking to raise $500 million.
Angelo Gordon and AllianceBernstein were among the nine fund managers the U.S. Treasury recently chose to run the so-called public-private investment program, known as PPIP, that could buy up $40 billion of toxic securities from banks eager to clean up their balance sheets.
The new IPO filings come on the heals of a flood of follow-on offerings by existing property REITs. Those companies have raised more than $15.2 billion in follow-on offerings this year in a bid to lower debt levels, according to Thomson Reuters data. That's up 150 percent from a year ago.
As investors have been reassured REITs have been properly recapitalized, REIT stocks have rebounded 50 percent from lows hit in March, Smith said.
REITs were trading at significant discounts because of the market's view that they did not have access to capital, debt or equity, said Smith.
Still, that recent performance is no guarantee the REIT IPOs will be met enthusiastically by investors.
In June, Invesco Mortgage Capital -- owned by PPIP manager Invesco -- slashed the size of its IPO by more than half, settling for $170 million.
It may take some time to know just how welcoming investors will prove to be for the new REITs -- none of the REIT IPOs in pipeline has set a pricing date yet. (Reporting by Phil Wahba and Ilaina Jonas; Editing by Tim Dobbyn)