Commercial Mortgage REIT IPOs: Coming Up Short

by: Alex Khandelwal

There has been a recent wave of commercial REITs announcing public offerings in the third quarter of 2009. Despite the seeming popularity of this business trend, there are some clear problems in the realm of commercial mortgage related REITs. The unifying theme among these REITs to go IPO this year is that many of the offerings were only able to raise half of their intended capital (or less). Furthermore, the weakened demand for commercial REITs is amplified by multiple firms postponing their initial public offerings.

The first of the recent REITS to go public and miss targets was CreXus Investment CP (NYSE:CXS) which debuted on 9/16/2009. The original goal for this offering was to issue 33.3 million shares at $15/sh (~$500 million). They were only able to issue 13.3 million shares at $15/sh (~$200 million) or 40% of their target. Currently, CXS shares are trading at $14.16 (as of close on 10/1/2009), down 5.60% since its initial offering.

The next offering to follow suit was Colony Financial (NYSE:CLNY). Tom Barrack, founder of the LA based private equity and real estate firm, Colony Capital launched the latest venture Colony Financial on Wednesday September 23, 2009. The original terms of the deal were intended for 25 million shares to be issued at $20/sh (~$500 million). The offer only ended up issuing 12.5 million shares at the original price of $20/share (~$250 million) or 50% of the target. Currently, CLNY shares are trading at $19.51 (as of close on 10/1/2009) and has remained in a relatively small trading range since going public ($19.25 - $19.66).

The same day CLNY went public, yet another commercial mortgage REIT Apollo Commercial (NYSE:ARI) had its IPO. Apollo cut its proposed deal size from 20 million shares at $20/sh (~$400 million) to 10 million shares at $20/sh (~$200 million) which is also half of the intended offering size. Apollo shares are off more than the previously mentioned securities since going public. As of close of market on 10/1/2009, shares traded at $18.15, down 9.20% since going public last week.

In addition to these companies coming up short on their proposed deals, two other companies actually postponed their IPOs. Foursquare Capital (NYSE:FSQR) and Ladder Capital Realty Finance (NYSE:LCG) are the latest companies to withdraw their offerings. Foursquare was set to go public last Thursday (9/24/09), and Ladder Capital was aiming to go public this Tuesday (9/29/09). It would not be surprising if the failure of CLNY, CXS, and ARI to raise expected capital was the main consideration for these firms to postpone their offerings.

The next obvious question is, why are these mortgage backed real estate investment trusts having trouble raising capital? The most apparent answer is the timeframe in which these securities went public. The sheer number of REITs going public within a close time proximity could be the reason for the lack of investment.

Another answer may lie in the actual property that these companies own. Unlike conventional REITs which own real property, these trusts own mortgages. According to analysts, the uncertainty of the blind pool of assets owned by these companies is unsettling to investors.

Suspicion also surrounds the fact that these private equity firms are turning to the public to raise capital. This may be a signal that all other sources of capital have been tapped out, and this approach of seeking public funds indicates a last resort strategy by private equity firms.

Although there may be some opportunity in the CMBS market, the inability to raise sufficient capital by recent offerings has dwindled investor confidence. Negative news surrounding the latest public offerings by commercial mortgage REITs will likely take time to subside before this segment gains steam.

Disclosure: No positions in ARI, CXS, or CLNY as of 10/1/2009.