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Mortgage REIT IPOs: There Is Vibrant Life After Death In CRE Debt

 July 26, 2009 01:10 PM


In just the past two months, 8 Mortgage REITs have filed to raise $3.9 billion in fresh cash, which should not be all that surprising. Retail financial advisors are saying that buckets of high net worth cash are sitting on the sidelines, waiting for opportunities in distressed commercial real estate. With several REIT follow on offerings up 150 percent so far this year, the public market is clearly betting on a turn around. Indeed, back in May, it appeared that the 52 week lows for REITs had already come and gone. Investors are now feeling safe enough to travel even farther down the curve and back into CRE debt, and a slew of new Mortgage REITs are emerging to greet them.

Ladder Capital is the latest aspiring Mortgage REIT, with plans to raise raise $400 million to invest in distressed whole loan mortgages. Ladder Capital Realty Finance (LCRF), as the new firm will be known, will primarily target first mortgage originations as well as senior participations in fixed and floating first mortgage loans.

Regulatory filings indicate that LCRF may also originate and acquire CMBS using TALF money, invest in some B-note and mezzanine loans, as well as provide financing for third party purchases of CRE notes and first mortgages.

Ladder was founded back in October of 2008, when optimism was in even shorter supply than cash. Ladder has already raised $611.6 million from investors, including investments from founding partners TowerBrook Capital Partners, GI Partners and Meridian Capital. The firm has since invested $428 million of that in various deals, including the purchase of Florida's FirstCity Bank of Commerce, which will be renamed Ladder Capital Bank.

In addition to LRCF, Alliance Bernstein, Angelo Gordon, Apollo Global Management, Colony Capital, Starwood Capital and Western Asset Management have all registered to raise equity for their own Mortgage REITs. Invesco's pet Mortgage REIT is already trading, but it had to cut the size of it's offering in half, to $170 million, in order to clear the market. If these new entrants are successful, it will be a strong vindication of the much derided TALF program, and even more evidence that we are not sailing over the cliff into deflation, perennial depression and complete financial oblivion.

The filings make for great reading. Ladder said there is now an "unprecedented market opportunity" to originate well-priced loans. Colony said that the the credit crisis was causing an "over-correction" in commercial real estate debt and that there would be a "protracted opportunity" originate attractive loans. Alliance's new REIT, Foursquare Capital, said that the "current distressed condition in the financial markets" would allow it to buy mortgage assets at "significantly depressed trading prices and higher yields." As for Barry Sternlicht and Starwood, their filings were even more emphatic: "the next five years will be one of the most attractive real estate investment periods in the past 50 years,"

Vornado Realty Trust, much to the chagrin of public shareholders, is raising a $1 billion private real estate fund that will be its "sole vehicle" for investing in distressed office and retail assets in New York and Washington DC. Vornado may have an easier time of it in the public markets: since the start of 2009, 51 REITs have raised more than $16 billion in public equity, according to NAREIT. These numbers tell a compelling story, and there is a lot of "smart" money out there waiting for a bottom that if not already here, soon will be.
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