Drought Ends for REIT IPOs

As public monies continue to seek a safe haven in real estate, investors are catching glimpses of what's been a rare bird of late: the REIT IPO. “REITs have continued to perform well in a marketplace where not much else is working,” says Dale Anne Reiss, an Ernst & Young real estate consultant who specializes in REITs. “So much money is being raised by private REITs, players are saying, “Why not go public where it's more liquid?'” Analysts estimate that private REITs raised between $4 billion and $6 billion in new capital in 2002.

While only five REITs went public between 1999 and 2002, four have emerged this year and there are more at the door. In June, American Financial Realty Trust and Maguire Partners raised the brunt of the $1.7 billion in IPO's thus far in 2003, the largest REIT IPO tally since 1998. In all, public REITs have issued more than $5 billion in new common equity in 2003, already surpassing 2002. That, coupled with brisk insider selling, suggests the market may be overvalued, say analysts.

In fact, Morgan Stanley lowered its REIT view to “cautious” on Sept. 8, possibly reflecting REITs' 24% gain on a total-return basis in 2003, according to the National Association of Real Estate Investment Trusts. The Morgan Stanley REIT Index, a benchmark of the most actively traded public REITs, soared from 378 in October 2002 to the mid-500's in early September 2003. Of 130 public REITS tracked, 68 posted 52-week highs in early September, the most since April 2002.

Unlike the mid 1990s, REIT investors now treat REITs as income stocks, not growth stocks, says analyst Keith Pomroy of industry tracker SNL Financial. “The reasons people are investing are more in line with the reasons REITs were established,” he says.

The consensus is that IPOs in 2003 have been moderate successes. American Financial, which acquires property occupied by banks and leases it back to them, raised $700 million in its June 26 debut, closing at $14.25, up 14% from its $12.50 offering. Analysts believe the Jenkintown, Pa.-based firm, which has leasebacks with Wachovia Bank, KeyBank, AmSouth Bank and Bank of America, articulated its strategy well.

“The niche we identified — meeting all the real estate needs of (banks) — is one that no other investor was serving,” says Nick Schorsch, American Financial president and CEO.

Los Angeles-based Maguire also raised $700 million in its June IPO but ended its first trading day where it started, at $19. The firm faced skepticism over its focus on the office sector in downtown L.A. Maquire's properties there are 90% leased.

Both companies said they planned big buys, then delivered. American Financial bought an $800 million portfolio from Bank of America, including Chicago's 50-story Bank of America Center, where the bank will lease back 5.2 million sq. ft. in a 20-year deal. Maguire bought two fully occupied Class-A buildings in downtown Los Angeles totaling 326,000 sq. ft. for $79 million.

Two August IPOs, Ashford Hospitality Trust and Gladstone Commercial, raised $300 million combined. Dallas-based Ashford, which owns six hotels, raised $202 million, pricing and closing at $9, the bottom of its $9 to $11 range. Ashford will also originate hotel mezzanine financing and first mortgages. McLean, Va.-based Gladstone, a single-tenant commercial/industrial property specialist, raised $99 million in its IPO.

Several other companies are in varying stages of converting to REIT status, including First Potomac Realty Trust of Bethesda, Md., and Rayonier, a forest-product giant based in Jacksonville, Fla., which will become a public REIT on Jan. 1, 2004.

And what about concerns that the Sarbanes-Oxley Act could deter companies from going public? Schorsch says the federal legislation hasn't been a barrier. “Independent board members represent at least two-thirds of (American's) board of directors, and the board is actively involved in major acquisitions and corporate governance.”

IPOs Heat Up in Summer 2003

REIT Property Niche Date of IPO IPO Offering Current Stock Price (9/16/03)
American Financial Realty Trust Bank branches June 26 $700 million $14.13
Maguire Properties Inc. Office June 26 $700 million $20.00
Gladstone Commercial Corporation Diversified August 13 $99 million $14.90
Ashford Hospitality Trust Inc. Lodging August 26 $202.5 million $9.18
Source: Company Info

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