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Public market will be picky with future blind pool offerings

After a wave of blind pool mortgage REITs hit the public market this summer, retail and institutional investors became more selective about the firms they backed. That will continue into 2010, argues Mayer Brown’s Ed Schneidman.

Private fund managers could find raising blind pool capital through the US public real estate markets more difficult in the future as retail and institutional investors become increasingly picky about their investments, Mayer Brown’s Ed Schneidman told PERE.

This summer, a wave of private real estate fund sponsors targeted the public markets as a means of raising equity for their debt strategies, launching blind pool vehicles that would target distressed commercial mortgages.

I’m sure we will see more sponsors target this area, it’s just a question of how many. The public markets are being particular about what they invest in.

Ed Schneidman, partner corporate matters and securities, Mayer Brown

Starwood Capital Group was the first, and most successful, raising more than $920 million for its mortgage REIT, Starwood Property Trust, in August and was quickly followed by the likes of Colony Capital, Apollo Global Real Estate, Ladder Capital, AllianceBernstein, Brookfield Asset Management and Marathon Asset Management among others.

However, as soon as investor appetite for blind pool emerged, it apparently disappeared, with Colony and Apollo raising just 50 percent and 33 percent of their respective equity targets and Ladder and AllianceBernstein postponing their planned IPOs. (Read PERE’s interview with Ladder Capital and plans for its partial blind pool REIT here).

Schneidman, a corporate and securities partner at the Chicago-based law firm, said part of the reason for the rapid decline in investor appetite was the fact the REITs were structured as blind pool investment vehicles, whereby investors backed the firm’s, and its executives’, strategy and track record but had no specified assets with which they could underwrite their investment.

The relatively untested approach worked for Starwood, but, as Schneidman said, public market investors are being selective about what they invest in going forward and possibly questioning how much of a distressed debt opportunity there will be.

“Investors didn’t see the long-term growth opportunity in distressed debt that some obviously believe is there,” he said.

Private fund managers also faced challenges with investors insisting the actual initial value of the REIT shares be as close as possible to the gross offering price per share, with no reduction for costs or dilution before investments are made, according to a briefing paper by Goodwin Procter. In some cases sponsors paid part of the underwriting fees or deferred the fees until a specified return on had been reached. Sponsors were also asked to reduce or defer management fees and reduce or eliminate initial equity grants, the paper added.

It’s not just blind pool debt vehicles that are affected though. Pebblebrook Hotel Trust and Chesapeake Lodging Trust were set to raise $350 million and $250 million respectively in blind pool equity REITs at the start of December. Pebblebrook succeeded in hitting its goal, but the Chesapeake offering was pulled, according to the Wall Street Journal.

Schneidman said blind pool offerings –both debt and equity – would likely continue to be a “pretty limited” fundraising opportunity. Partial blind pools, and blind pools with one to two cornerstone investors already in place, could ease investor concerns by “validating a strategy before pricing”.

However, he stressed, public markets shouldn’t be judged as an easy means of raising capital. “I’m sure we will see more sponsors target this area, it’s just a question of how many are able to succeed. The public markets are being particular about what they invest in.”

Schneidman added, in the longer term, the IPO market was likely to favour private firms with established management and which control an existing income producing portfolio.

Selected IPOs and IPO filings by mortgage REITs in 2009
(as of 30 September 2009 and according to Goodwin Procter RESource briefing)



REIT Sponsor


AG Financial Investment Trust

Angelo Gordon & Co.


Apollo Commercial Real Estate Finance

Apollo Global Management

$200m (actual)

Bayview Mortgage Capital

Bayview Asset Management     


Brookfield Realty Capital Corp

Brookfield Asset Management


Colony Financial

Colony Capital  

$250m (actual)

CreXus Investment Corp.

Annaly Capital Management

$200m (actual)

CWCapital Realty Trust

CW Financial


Cypress Sharpridge Investments

Cypress Group/Sharpridge Capital Mgmt

$100m (actual)

Foursquare Capital Corp.             



Invesco Mortgage Capital

Invesco Ltd.       

$206m (actual)

Ladder Capital Realty Finance    

Ladder Capital Finance


Marathon Real Estate Mortgage Trust

Marathon Asset Management


PennyMac Mortgage Investment Trust

Private National Mortgage Acceptance Co

$320m (actual)

Starwood Property Trust

Starwood Capital Group

$932m (actual)

Sutherland Asset Management

Waterfall Asset Management


Transwestern Realty Finance     

Transwestern Investment Company


Western Asset Mortgage Capital Corp.

Legg Mason


* The sponsors have announced the indefinite postponement of these offerings.