AMERICAS NEWS: The REIT opportunity

Since the start of 2009, US REITs have raised $24.2 billion in equity from the public markets – 75 percent more than in 2008 and two-thirds of the total raised in 2007. For many real estate investment trusts, the share offerings have been a crucial way of raising capital to delever their balance sheets and pay off debt with looming maturities.

However, according to the real estate-focused private equity investor GI Partners, the move could be problematic for trusts in the long-run. “It’s an incredibly dilutive way to raise capital,” GI founder Rick Magnuson said. “The dilution is so significant it will be very difficult for some REITs to grow their earnings per share in the future.”

At the start of September, the Menlo Park, California-based firm bought a 75 percent stake in a Denver super regional mall from REIT Macerich. The deal saw GI pay $124 million in cash for the 1.4 million-square-foot FlatIron Crossing shopping centre in Colorado, assuming $136.5 million of a $182 million mortgage. As part of the transaction, GI was given warrants to buy 1.25 million shares in Macerich.

The deal, Magnuson added, was a “time intensive but creative” way for shopping mall operator to recapitalise. “Recapitalising with these types of ventures avoids having to dilute existing shareholders. In some cases, other REITs have issued common stock which has diluted their existing shareholders by up to 40 to 50 percent.”

In Macerich’s case, the REIT needs to be creative in terms of raising capital with $60 million of loans set to mature in 2009 and a reported $1 billion due annually between 2011 and 2013.

For GI, which is the lead investor that helped launched the debt platform Ladder Capital, distressed REITs could be a big opportunity.

The firm hopes to close on five or six similar-such REIT recapitalisations. The firm will also target more traditional distressed situations, such as buying the debt of performing assets, for its $2 billion GI Partners Fund III, which invests in real estate-related industries, such as healthcare, technology, finance, retail and lodging. Fund III is 20 percent invested, Magnuson said, adding that the retail and hospitality were two industry sectors he was particularly attracted to. “They are very out of favour at the moment and therefore very opportune for us.”

During 2002 in the wake of the tech bubble burst, GI targeted another “out of favour” sector, buying vacated or underused technology centres. By 2004, it had acquired 25 properties for its $526 million Fund I. At press time, GI had sold the final asset from the portfolio, a 310,000-square-foot property in Frankfurt which it sold for $28 million.

The deal helped realise a 3.7x multiple and gross IRR of 60 percent for the real estate portion of the fund. GI rolled up 21 of the 25 buildings into the US REIT it formed, Digital Realty Trust. Fund I is expected to be fully realised in the next 12 months.