June produced a flurry of new REIT activity with two IPOs that hit the market in a one-week period and a third waiting in the wings. Although most are chalking up the timing to mere coincidence, the offerings could be a good measure of how favorable the climate is for new REITs.
The three REITs that launched the week of June 12th include Safety, Income and Growth; Four Springs Capital Trust; and Granite Point Mortgage Trust.
“Overall, I would characterize the market as inviting for IPOs, given that volatility is low and macroeconomic factors continue to support high asset prices,” says Brad Schwer, a REIT equity analyst at Morningstar Research Services. The IPOs include:
- Granite Point Mortgage Trust Inc. (GPMT): The REIT went public with its IPO on June 23rd with 10 million shares priced at $19.50 per share. The company expected to generate net proceeds of about $181 million.
- Safety, Income and Growth, Inc. (NYSE: SAFE) announced June 29th that it had closed its $250 million initial public offering and concurrent private placement, raising $246 million in total net proceeds.
- Four Springs Capital (FSPR): This IPO was still pending as of June 29th. The company has said that it intends to offer 5.6 million shares at an estimated price ranging between $17 and $19 per share.
The new additions enter the market in a period when IPOs have been relatively quiet. Last year saw only three total IPOs. Although the count for this year just jumped to seven, it is still well below the boom in 2013, when the market welcomed 19 new REITs, according to NAREIT.
“The bigger issue is that we are late in the cycle, growth is slowing, interest rates are heading up and NAVs have been lower,” says Haendel St. Juste, a REIT analyst with Mizuho Securities. “So it is probably not the most optimal market backdrop to be thinking about IPOs.”
Despite improvement in the stock market, REITs continue to face headwinds on returns and stock prices. Year-to-date returns for the S&P 500 Real Estate Index as of June 27th averaged 7.44 percent, trailing returns of the broader S&P 500, at 9.13 percent. In addition, a number of REITs are still trading at substantial discounts to NAV. “So it’s truly a mixed bag when it comes to how receptive REIT investors will be toward new IPOs,” says Schwer.
There are sectors of the REIT market that are outperforming their peers. For example, triple net lease companies have traded relatively well recently, which may have created a good window for Four Springs Capital, which specializes in triple net lease assets. Four of the five triple net lease REITs covered by research firm Green Street Advisors are trading at or above NAV. So that is a favorable climate for other net lease companies to try to do an IPO and access public capital, notes Dirk Aulabaugh, managing director of Green Street's advisory group.
Berkshire Hathaway also bought 18.6 million shares—a nearly 10 percent stake—in net lease REIT STORE Capital Corp. in late June, which has brought more attention to the triple net lease sector. The one exception that could give investors pause is Spirit Realty Capital Inc. The net lease REIT is struggling due to high exposure from troubled retailer Shopko, among other investor concerns.
Another concern for the broader REIT industry is that the newcomers could put added strain on a market that some view as already overly crowded. There are now more than 190 REITs trading on the New York Stock Exchange. The counter point to that is that the public market only owns about 10 percent of the total commercial real estate market.
“I think there is always room for high-quality companies that may be able to provide REIT investors something that they can’t get today in the public markets,” says Aulabaugh. Safety, Income and Growth is good example of that in terms of the assets they are pursing. The public REIT space doesn’t have much that emulates what the firm is trying to do, which is specializing in long-term ground leases, according to Aulabaugh. Their story of stable cash flow and durability is one that could be appealing to REIT investors, he says.
“I don’t think the market is oversaturated. In the big scheme of things, it’s still a relatively young market,” adds Schwer. The IPOs coming on-line give investors more choices for portfolio diversification. “So we view incoming IPOs as mutually beneficial in that firms gain better access to capital by tapping into the public markets, and investors increase their options for parking cash,” he says.