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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.
h/t SB
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If the A123 Systems IPO (underwritten by GS, who else) gets done before the market reverses then we'll have our next IPO bubble. This financials takeover of "green" industry would perfectly square with Taibbi's predictions in his last GS article.
A123's S-1 filing dated August 8, 2008:
http://www.sec.gov/Archives/edgar/data/1167178/000104746908008964/a2186822zs-1.htm
What a horrid balance sheet. Buyer beware!
Let's party like it's 1999 and the new Energy economy.
If it's a success, I imagine GS will try to take several other of their 'green' companies public: SunEdison and GridPoint are two that I know off the top of my head.
I think when Hilary Clinton approached India with the Carbon Scam she was told something like. Bitch go home. But of course in a polite Indian way.
Investors balked because the proceeds are going into blind pool mortgage REITs. The less dilution off the bat the better it would trade post deal. Really no different than deferring a fee on a SPAC deal. This has nothing to do with equity REIT offerings where there is considerable investor demand.
A question for ZH members
We all know the Fed and the current administration will do whatever it takes to prop up residential and commercial real estate valuations. We also understand that before the CRE/housing crisis can truly end, housing prices and commercial real estate must come into balance with incomes and profits. As the Administration's policies will not allow this to happen, what will be the next step?
Possible Scenario
"Effective immediately, in a last-ditch effort to stabilize the residential and commercial real estate markets, Congress has passed legislation that gives the Federal Government sole authority to set pricing for all commercial and residential real estate."
Granted the economy would have to be in serious trouble for this to happen. My question is: Could it happen?
Yes, I've seen it before in a country on the other side of the globe, but it finally collapsed due to that system in 1991. Problem is, for them to start doing that, they would effectively need to take full control of our private enterprises, which naturraly would not happen in our democracy... Oh wait, never mind...
I think Bernanke's only chance was to push mortgage rates down below 4%, and that didn't happen. The 'wait it out' approach is lunacy and destined for catastrophic failure.
Let's see...
Since the banks have access to cheap funds through the Fed but won't lend until the RE knife has hit the floor... and the knife won't hit the floor until the banks start lending...
Just nationalize the banks and... voila... everyone gets a 1% mortgage. $800/month for a million dollar mansion. That would put a floor under RE prices I think.
Oh wait... no - can't work... it leaves out the banks...
The real estate "industry" would have convulsions over that one. I mean how can you pump properties in the future when there would be no point.
I heard an economist say once that the price for house should be no more than 10 times what you could get for a yearly rent on it. Makes too much sense that it will not happen.
The way this will end is that the FED will continue the nonsense until it can't. If they lose the bond market, which I think they will eventually, say goodbye to equities.
Judge Rakoff in the news going after the SEC. Good.
edit...no link, story developing per cnbc dot com. not on b'berg yet
I can't imagine how much money people have lost by taking the advice of this site
That would be ZERO money lost because ZERO hedge offers ZERO investment/trading advice...
...Douche.
And when things really hit the fan, it'll be the bull-shooters losing all the green.