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.

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.

More S-11's

There was a rush to file S-11's on last friday; in front of the federal National Plagiarism Awareness holiday on January 18th.

• S-11/A Chatham Lodging Trust. Chatham trust is run by Jeffrey H Fisher who was CEO of Innkeepers USA Trust (KPA) a New York Stock Exchange-listed hotel real estate investment trust, or REIT, from its inception in 1994 through its sale in June 2007 to Apollo Investment Corporation (AINV). Seven of the eight members of the board of trustees of Innkeepers at the time of its sale in June 2007 have agreed to serve as trustees of our Chatham Lodging Trust.
  
  More or less Chatham will be Innkeepers 2.0. The new trust is wisely going after upscale extended stay hotels, since these are less sensitive to tourist traffic and more to the mobility of the business classes. To help the trust get its start, Fisher has assembled an initial portfolio of hotels for the REIT to purchase.
• S-11 Colony Financial. Colony is filing for a secondary offering. The best part of the S-11 is the discussion of events subsequent to the filing of CLNY's last 10-Q. The joint venture with the FDIC is data point, from which you can draw many ideas about the future direction of the company. I remain very optimistic about this company's ability to obtain high IRR's for external shareholders even with the burden of the incentive fee (20% xs of 8%).
• S-11/A Pyramid Hotels & Resorts, Inc. Pyramid is a weird kind of beast. It's an internally managed REIT which is designed to gradually absorb the resources of Pyramid Hotel Group. The S-11 contains a very frightening risk disclosure section, which can be interpreted as management having a good grasp of the risks involved (a good thing), or it is perhaps scary enough to scare anyone from investing in Hotel REITs (a bad thing).
• S-11/A Terreno Realty Corp. More updates from the ex-AMB folks. The current market has shown little love for the existing industrial equity REITs, and that makes it hard to see what is compelling about this IPO at the conceptual level. Terreno is a bet that fresh money will be in better shape over existing players who are grappling with de-leveraging.

In the interests of full disclosure: I own some shares of Colony Capital (CLNY)

S-11's Three fresh today.

Today had four S-11's (Registration of securities issued by real estate companies) uploaded to the SEC's edgar system. If we ignore the private reit, we find...

1. Terreno Realty Corporation. (TNRO) -- Internally managed (ex AMB folks) reit targeting industrial properties. Industrial is an odd sector because the key issue is scoring good locations. The properties themselves tend to be cheap to build, since they generally big empty boxes with little finishing (except for high end R&D lab space which is its own niche targeted by folks like Biomed Realty (BMR) and Alexandria (ARE). Tight well aligned compensation structure, but most of the existing players are trading below replacement cost, because there is no shortage of industrial property what so ever.
   


2. Americold Realty Trust -- Cold-storage warehouses. These are a niche property type, though in general the demand for cold storage grows slowly. Americold used to be a Vornado project, before getting sold to its current owners.
   


3. Callahan Capital Properties (CCP) -- Class A Office REIT lead by ex-Trizec folks targeting properties in major coastal markets. I wish there was more to say to about this.