The boom in launching diversified mortgage REITs during the mid-2000s has officially busted. Hypo Real Estate Bank International AG is folding its US commercial mREIT, Quadra Realty Trust (QRR), back into its portfolio less than 12 months after Quadra's February 2007 IPO.
There was no commentary in the press release announcing the acquisition other than the terms and the price of the tender offer. Quadra shareholders will get a total of $11/share in cash and a special dividend. Shareholders who bought into the IPO at $15/share last year have seen a 30% capital loss (not considering the dividends Quadra has paid of $0.42/share).
The offering was pretty much a bust from the outset, as Quadra barely traded above its IPO price for a few days before settling into a constant decline. I believe the reason for Quadra's failure is set out pretty plainly in the Company's IPO prospectus:
Although our Manager has been active in real estate operations and lending for many years, it has no experience operating a REIT and operating a business in compliance with the numerous technical restrictions and limitations set forth in the Internal Revenue Code or the Investment Company Act applicable to REITs.
Hypo had no prior experience with managing the day-to-day cash flow challenges that REITs impose, and without access to the capital markets (particularly CDOs) to fund Quadra's portfolio, liquidity was being squeezed by margin calls and haircuts on the warehouse lines. There was, quite simply, no back-up plan if CDO issuance was not an option.
I don't believe Quadra is the only commercial mREIT struggling to find its footing as capital markets remained closed. As earnings reports roll in next week, a key issue for management at the CRE mREITs is to have a well-defined strategy for managing the business in the absence of CDO issuance.