Colony Raises Half Of IPO Target On REIT Offering Glut

One example of the market saturation with the speculative commercial real estate bubble is yesterday's REIT IPO by LA-based Colony Capital, which raised just $250 million, a mere half of the number circulating as recently as a week ago. The reason for this major surprise: a glut of comparable offerings by competitors such as Apollo Group and Starwood Capital, all of which are rushing into the public markets for the same reason insiders continue to sell in bulk: the tide is about to turn. And with the dramatic drop in investor interest in just one week, it likely already has.

Some other considerations that are occupying investors' minds, courtesy of the LA Times blog:

Many investors just don’t like the structure of the deals. Shareholders of these real estate investment trusts will pony-up hefty ongoing management and incentive fees from trust assets to pay Barrack and the other independent advisors. The advisors will work under contract to find and manage opportunities in distressed commercial mortgages for the trusts.

But what shareholders of the REITs will reap is a big unknown. The return to investors will depend on the income generated by the loans and any capital gains the trusts earn by eventually selling the debt -- less any losses on troubled loans that go from bad to worse.

And as yesterday's S&P downgrade of a recent JPM Re-REMIC highlighted, underlying real estate loans are souring at a quicker pace than anticipated, especially tranches that are closer to the equity and thus with least protection. Thus how associated equity fares in this environment is purely a function of the bubble, as the fundamental picture continues deteriorating.

But possible future REIT troubles do not end there:

An analyst at one brokerage that helped underwrite the Colony Financial deal said he had plenty of calls from interested investors, but that many didn’t like the unavoidable "blind pool" aspect of the deal.

What’s more, he said, investors know that a key reason why private-equity shops are turning to the public market to raise funds is because many of their pension funds and other usual sources of money are tapped out. In other words, the public market is the fall-back option, which also makes those investors suspicious.

Finally, this analyst said, given that many of the new mortgage REITs that have come public in recent months immediately fell below their IPO prices when trading began, investors figure they may as well wait to buy any new deals, including Colony.

The mentality, the analyst said, is: "If you know it’s going to trade down, why buy in the IPO?"

Why indeed? Alternatively, why buy the stock of REITs that diluted shareholders at the bottom of the current run up with tens of billions of equity follow on offerings? Yet investors are convinced that cap rates are now a favorable arbitrage vis-a-vis REIT cost of capital. How long will this persist absent an improvement in the commercial real estate landscape? And how much of that is merely a function of the current credit exuberance, which itself is a spillover of the ebullient equity market? When the tide finally recedes, will REITs be the first to sink under the incoming wave? Many answers will come in time, although in the immediate future look for the performance of brand new stock CLNY which starts trading today. It may well be a harbinger of things to come for the broader REIT space.

Comments

[Miles Kendig]

Trash in, trash out.

Rinse & repeat until all the suckers are cleaned out, then go to uncle sugar for a fix.  Capitalism Sino-Alglo-American style.

[Cursive]

"But what shareholders of the REITs will reap is a big unknown."

Yeah, but the earnings estimates are probably have the P/E ratio at, like 6.  Don't even think about what the FFO or AFFO is.

[Gilgamesh]

IYR being traded like AIG this week.

[Hephasteus]

Forget IPO's, forget corporate bonds. Make them sign a loan to the private investors using pieces of the company as collateral. ART OF THE DEAL the jokers. Don't just give them money when they can wipe you as a common stock holder anytime they choose.