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REIT IPO market lacking catalyst, compelling growth stories

While the market for go-private deals among public real estate investment trusts is all fireworks, the go-public arena is almost dark.

There have been just three completed REIT IPOs so far in 2018, continuing the slow trickle of the previous two years, according to S&P Global Market Intelligence data. Only one of the offerings, Americold Realty Trust's, could be deemed to have been a success so far from a share-performance perspective.

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To explain the REIT IPO doldrums, industry players point reflexively to rising interest rates, widely perceived as a bane to REIT valuations and frequently cited as the cause for the discounted share prices of the last several quarters. James Cassidy, executive managing director of capital markets at Newmark Knight Frank, said in an interview that even established public REITs are having a hard time raising capital and are resorting to asset sales to fund capital requirements.

"If those guys weren't underperforming," Cassidy said of the prominent, large-cap names in the space, "there would be a heck of a lot more IPO action."

Ettore Santucci, a partner in Goodwin Procter's business law department, said the REIT IPO market is also lacking a "catalyst" a level of excitement comparable to the enthusiasm that has propelled biotechnology-oriented IPOs over the last few years.

"What you're lacking is a really fundamental thesis for why investors either need or want new names in the REIT sector," Santucci said in an interview. "At the end of the day, that's what IPOs are demand by investors for new names either because there isn't enough product ... or because the names are tired and they want new names, or because the new names offer an exciting performance outlook that existing names don't offer."

Santucci pointed to a central paradox of real estate at present: REIT industry leaders and investors, outside of weaker retail names, feel good about the business, but that confidence is not manifesting significant new areas of expansion.

"They're unhappy with their stock price, but they're not unhappy with their portfolios," Santucci said of the public REITs. "They're not unhappy with the fundamentals. They're not unhappy with their tenants. ... It's a paradoxical situation where the sector is doing fine, investors are making money, but there's no one saying, 'We really need five more residential REITs, or three more office REITs.'"

A dramatic shift in market sentiment is unlikely in the second half of the year. Josef Schuster, founder of the research firm IPOX Schuster, said the overall IPO market slows in July and August, and again as the end of the year approaches.

In an interview, Schuster described the REIT IPO market as "highly selective." A prospective new REIT must be highly specialized, such as Americold with its cold storage and refrigerated warehouse business, to break through the market stasis with a compelling growth story. Schuster said the data center market, and potentially the legal cannabis sector, could possibly yield an offering or two in the coming quarters.

Newmark Knight Frank's Cassidy meanwhile expects privatization deals to dominate the space, particularly in the industrial and multifamily submarkets, the two most "desirable" segments at present for their low capital costs and perceived resilience in a downturn.

"There's been so much money raised in the private sector, and there's so much dry powder on the sidelines — as much as there's ever been, in my career. You're able to be very efficient and put a lot of money out in a single deal, and you're able to get the arbitrage between where something may be publicly traded versus where it would be truly valued."

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