Merrill To Defer REIT IPO Fees As Investors Balk
In a sign that the REIT market may surprisingly lose its invisible bid, the primary beneficiaries of the IPO pump and dump game, namely Merrill and Deutsche, have announced they are deferring their underwriting fees for REIT IPOs "after buyers balked at the deals" (one doubts Cohen & Steers is part of this group of balkers).
According to Bloomberg:
Bank of America Merrill Lynch, the top underwriter of initial U.S. stock offerings this year, agreed to delay part of its fees from two recent sales until the companies, known as real estate investment trusts, generate an 8 percent return on equity for a full year. The New York-based firm will forfeit the payments if the target isn’t met within six years, according to regulatory filings. Deutsche Bank and Credit Suisse have accepted similar terms to underwrite mortgage REITs.
While a good start, it is surprising that the same methodology was not used in evaluating follow-on offering fees as well, a product which has allegedly generated Merrill several hundred million dollars in revenue (in exchange for a steady barrage of upgrade reports and Bank of America equity-to-loan refis).
BofA Merrill, Deutsche Bank and Credit Suisse agreed to defer a portion of their underwriting fee for a $335 million IPO last month by PennyMac Mortgage Investment Trust of Calabasas, California, SEC filings show. BofA Merrill and Deutsche Bank did the same on about $16.2 million in fees for the $810 million IPO on Aug. 11 by Starwood Property Trust Inc., a REIT in Greenwich, Connecticut, set up by investor Barry Sternlicht.
The move is putting pressure on other banks to follow suit. After PennyMac disclosed the revised underwriting terms on July 16, UBS AG agreed to similar terms for an IPO by New York-based Sutherland Asset Management Corp. So did Deutsche Bank and Morgan Stanley for Bayview Mortgage Capital Inc. of Coral Gables, Florida, according to filings.
It is stange that this is happening while the REIT bubble is still alive and kicking, on florid visuals that the next bailout program will be Cash For Office Towers. Maybe investors don't think those 100% returns in 10% cap rate companies are a slam dunk for much longer, so it actually makes sense to scalp a little of the top?
And here are the specifics:
[PennyMac] disclosed in a July 31 filing it would pay the underwriters 60 cents a share from the IPO proceeds. PNMAC Capital Management LLC, the manager for the REIT, agreed to kick in another 20 cents, the filing said.
The REIT will pay the underwriters another 40 cents and reimburse PNMAC Capital for the 20 cents it paid, once PennyMac’s core earnings exceed 8 percent of shareholders equity for four consecutive quarters. For this purpose, shareholders equity is calculated as the number of shares outstanding multiplied by the average price at which PennyMac sold shares through public offerings. The resulting ratio is also known as return on investment.
As the precedent has been set, it is only a matter of time before this standard becomes prevalent, and pressures investment banks to find the next IPO bubble. However, while REITs have an equity undercapitalization of well over several hundred billion dollars when one takes into accounts the 2012-2014 maturity cliff, bankers will be hard pressed to find another sector they can pick off quite as easily as this one.