Last week, the Wall Street Journal put on page what had been widely speculated in the commercial real estate community for months: Archstone, the behemoth multifamily company, might be gearing up to go public once again. If that happens—and it could happen this year—it would potentially be the largest IPO to ever take place, raising as much as $4 billion to $5 billion, according to observers.
As we all remember, Archstone-Smith had been the largest multifamily REIT and the world’s third-largest public REIT, until it was taken private in 2007 in a $22-billion deal by a consortium of Bank of America, Tishman-Speyer Properties, Barclays and Lehman Brothers. At the time, it was one of a bevy of public companies that flipped into the hands of private investors in a series of M&As fueled by the friendly capital market arena.
Until a few years later, when the tightening credit conditions once again made the public markets the favorable place to obtain capital. Eager to tap into the public markets, firms issued a spate of IPOs in 2009 and early 2010. Despite the rumors—which ramped up when Archstone CEO R. Scot Sellers appeared on the CEO panel of NAREIT’s REITWorld 2010 conference this summer—Archstone did not seek to issue common stock.
Just as well, since the IPO trend soon fizzled out as concerns brewed that all the new offerings on the market were overwhelming the public.
But that appears to be changing now. In recent weeks, we’ve seen a ramp-up in new offerings, particularly by companies in sectors that are expected to kick-start their recovery.
Take the hotel sector, for instance, which, if rumors end up a reality, could see a return of Hilton Hotels—taken private by Blackstone for $26 billion in 2007. Early last month, Summit Hotel Properties issued an IPO seeking to raise some $250 million. That same on the heels of RLJ Lodging Trust, recently formed by RLJ Development LLC, which sought to raise $550 million in an IPO.
As pointed out by NAREIT’s Brad Case, the RLJ offering stems from a private equity fund looking to tap into the public capital to repay maturing debt ($490 million of the $550-million raised will go toward debt repayment). In a Seeking Alpha brief, Case writes:
“This, then, is an example of what I expect to become more common over the next couple of years: a private equity real estate investment fund seeking to tap the public equity markets for the purpose of repaying maturing debt, and then recapitalizing to enter the market for acquisitions. The competitive advantage of publicly traded companies in terms of the cost and availability of capital is just too strong for private companies to ignore.”
The numbers coming in from year-end earnings reports demonstrate that point. As Paul Bubny notes in a recent GlobeSt.com article, REIT stocks are expected to outperform in 2011 after a stellar 2010, thanks in part to improving property fundamentals and investor appetite for returns. NAREIT reported that in 2010, public real estate companies raised some $47.5 billion, and US Equity REIT returns, at nearly 28%, almost doubled that of the S&P 500. This year is also off to a good start, with the FTSE NAREIT All REITs Index beating out both the S&P 500 and the NASDAQ Composite. Even REIT ETFs have been performing exceptionally well.
Returns aside, REITs also offer the opportunity for investors to own a piece of quality real estate in well-performing markets—an attractive prospect in today’s tough acquisitions climate.
Only time will tell whether a perfect storm is brewing for a new flurry of large IPOs, but it’s worth keeping a close watch on the signs the market is giving us.
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