More CRE Firms May Consider REIT Status After Recent Public Offerings

Two Real Estate Investment Trusts (REITs), Duke Realty (DRE) and FelCor Lodging (FCH) this week announced successful public offerings of common stock to raise capital. The recent success of these deals, and others before it, is being seen as increasingly attractive to other commercial real estate (CRE) firms struggling to raise funds, according to one real estate advisory firm. FelCor Lodging Trust Incorporated announced that it priced its public offering this week of 27.5m shares of its common stock at $5.50 per share. FelCor intends to repay or repurchase certain mortgage debt at substantial discounts and for acquisitions. On Thursday, Duke priced its public offering of 23m shares at a price of $11.75 per share to fund a joint venture and also repay debt. When a firm acquires REIT status, with the IRS there are certain corporate tax benefits. However, there are also more rules to how funds — which can be raised via stock exchanges — must be redistributed. According to Ross Prindle, a managing director of the Real Estate Services practice at independent financial advisory and investment banking firm Duff & Phelps, lenders to struggling CRE firm are being more cooperative than expected, though with bankruptcies looming (his firm is advising on a few currently) many commercial real estate firms will look to source liquidity. He noted that firms more and more are asking, “How can we go public to get access to the capital markets?” These firms, Prindle says, may be finding that REIT status is the best option. However, Prindle sees no change in the short term with the pretend and extend strategy prevalent in the market. “I think that negotiating with lenders is a lot easier than expected,” he added. “But on the lender side, there is little other choice. You can restructure, or you can let the loan default, put it on the book and take the ripple effect. The lender is either taking a haircut or, worse, foreclosure.” Write to Jacob Gaffney. Disclosure: the author holds no relevant investments.

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