Since REITs are more liquid, investors expect a lower return than they do from less liquid funds and other types of private real estate investments, Mr. Brodwin said. “It all boils down that at this moment REITs have a lower cost of capital.”
Some managers are launching REITs in order to “continue to play in the game,” said Brad Case, NAREIT's chief economist.
“The cost of capital is even cheaper than it was in the mid-1990s,” when REITs went on their last buying spree, Mr. Brodwin said. This will lead to more REIT IPOs.
Investment managers that have good track records and solid core properties with good cash flow have a better shot at successfully launching REITs than they do raising a real estate fund, Mr. Brodwin said.
“There are roughly 12 IPOs on file right now or waiting to launch this week,” said Ron D. Sturzenegger, managing director and global head of real estate, gaming and lodging investment banking, in the San Francisco office of Bank of America Merrill Lynch.
“Most of the companies (such as real estate investment managers) that are pursuing IPOs are putting their whole businesses, including management, in the REIT,” he said.
And most are already big players in private real estate investment businesses, looking now for an easier route to raise investment capital than the fundraising trail, he said. A few that are not big enough — because they don't own enough properties to form a sizable REIT — are entering into options to buy properties with the transactions closing after the REIT launches, Mr. Sturzenegger explained.
Hudson Pacific Properties Inc., a Los Angeles-based REIT, entered into option agreements with Morgan Stanley Real Estate and Farallon Capital Management LLC before taking the REIT public in November, Mr. Sturzenegger said. The real estate transactions that were optioned closed after the REIT went public, he said.
Real estate managers with closed-end funds they want to convert to REITs must get approval from their limited partnerships. “We're currently working on several ... to get the consent from investors to contribute their limited partnership interests for a share in a publicly traded REIT,” Mr. Sturzenegger said.
Many of the real estate managers converting to REITs have been down this road before. Hudson Pacific was formed by Victor Coleman, who was president of office REIT Arden Realty Inc., which was sold in 2005 to GE Real Estate for $4.8 billion, including debt.
“We are seeing a number of sponsors looking to take companies public again after taking them private in 2007,” Mr. Sturzenegger said.
“Sponsors generally like the public markets as they tend to be faster. Raising a private fund can take a year or more, whereas doing a road show for a REIT can be completed in as little as two weeks. In addition, once you are public, raising additional capital can be done in a follow on offering which is typically very fast, vs. raising a second private fund which still can take a lot of time,” he said.
In 2009 and the early part of 2010, a few REITs without an existing portfolio — so-called blind pools — were launched. Colony Capital LLC raised a blind pool REIT in September 2009, for example. Those REITs relied on the strength of the investment team and enticing themes such as distressed debt.
But, generally speaking, the days when a blind pool REIT could be raised are over, Mr. Sturzenegger said. These days, REIT investors want to know what will be in the portfolio.
