Tuesday, February 16, 2010

Weekend/Weekly Update on new REITs and IPOs

This and last week saw several IPO's/secondary offerings.

Terreno Realty

Terreno Realty IPO'd with a reduced offering of 8.75 Million shares at $20/sh. I'm not sure how much of the reduction from the original plan was due to general hostility to IPO's vs the specific business that Terreno wanted to persue. On paper, iwning property at a 9% cap rate with 40% leverage won'tgenerate the mid teens IRR's that folks are looking for these days. At the same time, the industrial REITs (especially the big ones like AMB) tend to trade a premium market multiple. So a fully invested TRNO could generate an impressive IRR from multiple expansion vs high cash dividend payouts.

Solar Capital

Solar Capital, a BDC entered the public markets with an offering of 5 million shares at 18.50/sh. This BDC is run by ex-Apollo/AINV folks, which makes it similar to PennantPark Investment Corporation (PNNT). This was a classic take under type IPO in which a company goes public at less than book value. The main purpose of the IPO was to create lqiuidty and stabilize the companies credit facility. The big question with Solar Capital is does the market need another BDC with a 2/20 management fee structure.

Piedmont Office Realty Trust

Piedmont Office Realty Trust, is finally public after years of pre-IPO drama, when it was known as Wells Real Estate Investment Trust. Like most non-traded REITs, Wells REIT became a cancerous monster, endlessly raising capital and buying new assets. After the company internalized management in 2007 it entered a multi-year dead zone while seeking a final liquidity event. During this time, the Lex-Win partnership of LXP + FUR launched a hostile tender offer, to shake things up and accelerate the "liquidity event". That event finally happened on Feb. 9, 2010 with the offering of 12 million shares at 14.50/sh, which was far below NAV. After the IPO, shares have floated upwards towards NAV (>16.50/sh) and if PDM's earnings power was given the same multiple as comparable REITs (BXP, DEI, SLD, CLI) the stock price would be much higher.

Hudson Pacific Properties

Hudson Pacific Properties, has filed an S-11, describing a new REIT intended to be "a full-service, vertically integrated real estate company focused on owning, operating and acquiring high-quality office properties in select growth markets primarily in Northern and Southern California." Senior managenment are ex-Arden Realty folks. Arden was the first of the really big public-to-private transactions when it sold for 4.8 Billion to GE Real Estate. The new REIT is born in the context of formation transactions which involve various funds and people assocated with Farallon Capital Management and Morgan Stanley.

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Tuesday, February 02, 2010

PennyMac's big 4Q09 loss.

Okidata, PennyMac has reported results 4Q09, of a loss of $0.07 cents per share. This isn't that surprising given the companies high cost structure and relatively low percentage of invested assets (the company claims to have invested ~37% of IPO proceeds so far). At this pace I would expect them to be mostly invested by late 2010. The companies ultimate ability to generate FAD is hard to predict, since they plan on buying non-performing assets and the servicing intensive assets will cause incremental G&A expense. It's still unclear how much of an advantage there is in buying whole loans vs discounted RMBS.

I am impressed that PMT management has decided not to do the easy thing which would have been to acquire Agency RMBS with repo leverage, and start earning the incentive fee. Investing in Agency RMBS would also hold the company over until it could acquire desirable assets.

Stanford L. Kurland, Chairman and Chief Executive Officer of PMT, stated:

"At this early stage in PMT's development, it is not surprising that operating costs have exceeded investment income. Over the past several months, our manager has focused significant attention on its ability to adapt and react to changing dynamics in the mortgage marketplace, including a low volume of available performing mortgage transactions, which offer greater opportunity for value enhancement, and less attractive trading levels for the pools that have been marketed. As it waits for the market to further develop, our manager has placed particular emphasis on expanding the operational capabilities and the range of sources for attractive investment opportunities available to PMT. This expanded menu of capabilities and opportunities includes: a conduit platform that will allow PMT to purchase newly originated loans from small mortgage lenders and repackage those loans for securitization and sale; increased participation in structured transaction and securitization activities; opportunities to acquire mortgage assets that result from distressed condo development projects that may include real estate development loans, existing residential loans originated by the developer, and residential loans originated by PennyMac Loan Services on our behalf; and investments in mortgage servicing rights of liquidating and other entities. Ultimately, we remain firm in our commitment to investing wisely on behalf of PMT shareholders who recognize that PMT's unique approach to the distressed residential mortgage arena requires patient, long-term capital resources."

The companies strategy of purchasing non-performing residential loans is capital gains oriented vs being current cash payment oriented. Assembling a portfolio of non-cashflowing assets is problematic given that the management fee must be paid in cash. Buying non-performing whole loans also favors management indirectly by causing cash leakage (aka fee income) in favor of PennyMac Loan Servicing.

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