Monday, January 25, 2010

Terreno IPO on ice.

It appears that Terreno Realty (TRNO) has postponed its IPO, because Goldman Sachs couldn't find enough IPO investors. I have mixed feelings about this, because I was honestly impressed by the companies road show. I went in as a complete skeptic, and was more convinced afterwards.

The management team (Blake Baird, Mike Coke) showed a profound understanding of how to build a quality real estate portfolio vs a just a very big one. They explained how they intended to side step the snare of merchant building and excessive hard leverage.

There are some places I thought the sales effort could have been better. My perspective is that of a vulture gliding through the sky, so things can be very different on the ground, and I hate to second guess anyone.

  1. Underwriting team. You need the smaller banks that do more REIT business vs a bulge bracket firm. Look at all the successful REIT ipo's of 2009-2010 and see who was underwriting.
  2. Concerns about industrial real estate. This remains a real headwind, somehow you have to convince people that this will not end up a deathtrap of high vacancy and low rents.
  3. A better explanation of what the existing public players did wrong (too much leverage, too much merchant building, too many low cost/low desirability assets) so that folks can distinguish the new platform from the old.
  4. A better growth strategy than "raise a lot of equity". Chances are that REIT equity will remain more expensive than sensible debt financing. It's good to talk a low leverage game, but equity REITs are a business where some amount of leverage is needed to obtain reasonable returns. One problem with a strategy of funding via unsecured debt at the REIT level is that maturities become lumpy.
  5. A discussion of leveraged real return, via leases with built in rent escalation financed with fixed rate debt. This is the best argument in favor of investing in equity real estate, and especially NNN real estate. You want to able to show how even if the company does nothing, there will still be dividend growth.

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