New REITs Struggle to Match Performance Levels of Established Players

Recent real estate IPOs continue to underperform the broader real estate sector, which may discourage other companies from going public this year.

As of Feb. 29, only one of the companies that completed IPOs in 2010 or 2011 had managed to outperform the SNL US REIT Equity Index on a total return basis since the respective dates of the companies' IPO completions. CoreSite Realty Corp. outperformed the Index, while American Assets Trust Inc., RLJ Lodging Trust, Terreno Realty Corp. and Whitestone REIT have underperformed the Index.

The performance can be attributed to both the companies’ strategies, as well as the timing of the market and overall investor interest. “It is a challenge for any new company to find its footing in the public market because investors already have lots of choices among established companies,” notes Jim Sullivan, managing director of Green Street Advisors’ North American REIT research team. “That said, a good real estate company with a high-quality portfolio, strong balance sheet, and clean corporate governance absolutely has a place in REIT world—they just need to prove themselves over time.”

Sullivan warns that the data could be a bit misleading. “Some of the companies were blind pools designed to capitalize on real estate capital market distress that just didn’t come about in the volume that most expected, and those companies have lagged as a result,” he explains.

Even so, the performance of the newer REITs impacts the REIT IPO pipeline. “The relatively weak performance of some REIT IPOs has definitely raised the guard of private companies that have been considering heading down the same path,” Sullivan points out. “However, capital is generally cheap and plentiful for public companies whereas it’s expensive and scarce for many private operators. That access-to-capital advantage is the primary motivator for heading down the public path.”

Specifically, CoreSite Realty Corp. is the company in question, with a 39.52 percent total return since its IPO completion in September 2010, besting the SNL US REIT Equity index by more than 17.28 percentage points.

Whitestone REIT led the remaining companies with a return of the 29.42 percent since its IPO completion in August 2010, but that figure still lagged the SNL U.S. REIT Equity Index by 0.68 percentage point.

RLJ Lodging Trust and American Assets Trust Inc., which boasted the largest IPOs in the past two years, posted returns of negative 0.16 percent and positive 9.21 percent, respectively, coming in 1.6 percentage points and 4.75 percentage points, respectively, under the broader real estate market.

Terreno Realty Corp. continues to underperform by the largest margin, with a total return since its IPO completion Feb. 9, 2010, of negative 27.01 percent, which is 87.14 percentage points below the return of the SNL U.S. REIT Equity Index during the same time period.

Meanwhile, the newest public REIT in the U.S., Rouse Properties Inc., was not created through an IPO, but rather through a 30-property spinoff from General Growth Properties Inc. REHT REIT commenced "regular way" trading on the NYSE on Jan. 13 and is the second-smallest regional mall REIT with a market cap of $507 million. Rouse Properties posted a total return of 21.92 percent between its first trading day and Feb. 29, compared to total returns of 6.02 percent for the SNL U.S. REIT Equity index across the same time period.

American Realty Capital Trust Inc., which began trading March 1, is not included in the current tally.

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