One reason is that REITs cram down desperately need the money, and while not all are teetering on the brink insolvency, most will do almost anything for fresh cash. This includes diluting their long-suffering shareholders bang zoom! to the moon, and cutting dividends prego! to the newly annointed.
How is this happening? Some intellectual honesty is called for here: REITs were simply oversold. Furthermore, no portfolio manager that I know of was willing to scale the ramparts for General Growth, no matter how many bankers GGP put to work pounding the phones, or how much they were being paid. Still, when there’s an abundance of supply, demand needs to be stoked, and that’s exactly what’s being done. Almost all of these REIT equity offerings are being sold in “over-the-wall deals”, much like tech stocks were in the late 1990s.
“Over-the-wall” deals are pre-arranged sales with leading investors at discounted prices, executed overnight. The news hits the tape the following morning, and the stock jumps. Basically, if you’re not “over-the-wall” you’re trapped beneath it, especially if you’re short. Indeed, one goal of the strategy – to scare the pants off of short sellers – is surely working. Nobody wants to be short a company whose balance sheet can be de-levered overnight, and that (re-equitization) is the other goal.
Unlike GGP, investors are flocking to these deals like moths to a porchlight. At a securities conference several weeks ago it’s just not true, there is a free lunch Mortgage REIT management presentations were standing room only. One of them, Chimera (CIM), had just used an $850 million offering to transform itself from a smoking heap of 2007 trade confirmations into a potential Microsoft of Mortgage REITs. Another, Redwood Trust (RWT) executed not one but two new issues, the latter just days after the conference, raising almost $500 million in equity.
REIT new issues have included such varied names as Alexandria Real Estate Equities (ARE), AMB Property (AMB), Pro-Logis (PLD), SL Green (SLG), Ventas (VTR) and Vornado (VNO). The AMB deal is a good example of how the REIT equity syndicate pot is being stirred. AMB’s $575 deal combined pre-launch “over-the-wall” meetings with the chosen ones, followed by overnight execution. The deal was 80% sold before it was even offered to the public – and then upsized 24% for good measure. It was sold at a discount of 8% to previous close, which isn’t bad considering that it represented almost 50% of the current shares outstanding, and that the stock traded up 16.5% the next day, resulting in an instant 25% gain for the new shareholders.
Who’s next? Everybody wants to know. Significantly, IPOs in registration are dominated by Mortgage REITs. These include Cypress Sharpridge (agency RMBS), Invesco (agency & non agency RMBS; CMBS; TALF loans) Penny Mac (non-agency RMBS), Sutherland (agency & non-agency RMBS) and Starwood Property Trust (CMBS/RMBS). These initial public offerings will list under the symbols CYS, IVR, PMT, SPT and SLD, respectively.
Others in registration are Brookdale Senior Living (BKD) and Investors Real Estate Trust (Nasdaq: IRET). Recent shelf offerings include Northstar Realty Finance (NRF), with JMP Securities (a large investor in New York Mortgage Trust (NYMT) and manager of its mortgage assets) as sole manager.
Even crippled Anthracite (AHR) may be getting into the act. Miraculously, the company was able to restructure its secured and unsecured debt last month, and a round of fresh equity is undoubtedly next on the list. Anthracite’s cozy relationship with Blackrock, which backstopped AHR with a line of credit in its darkest days, gives it an almost unparalleled window on the Fed’s growing portfolio of “toxic” mortgage assets. In this latest game of “if you’re not inside, you’re outside” being played with REIT equity, that may be all AHR needs to push it over the finish line.
Disclosures: Long NRF at the time of this writing.