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Non-Traded REITs May Look to Cash In On Market Cycle With Public Offerings

Niche Players Tout Management Experience and Strong Fundamentals In Entering Publicly Traded REIT Space
February 29, 2012
American Realty Capital Trust Inc.’s board of directors and chairman believe that the timing is right for more REITs to enter the publicly traded market.

That’s exactly what the non-publicly traded REIT is doing this week, with plans to offer up to 6.6 million shares of common stock at an assumed price of $11.50 per share in an initial public offering as the REIT’s operating partnership looks to repay indebtedness and raise general working capital.

American Realty Capital Trust, which owns single-tenant, free-standing retail, distribution warehouse and office properties primarily leased to investment grade-rated credit tenants, is scheduled to make its debut on the Nasdaq Global Select Market on Thursday, March 1, almost four years to the day after the company launched. It will trade under the symbol ARCT.

At the same time, it will conduct a secondary offering to raise an additional $50 million to $100 million, and make a tender offer to outstanding shareholders.

"It’s the perfect time to buy real estate and the markets are good right now, with a low interest rate environment, strengthening capital markets and strengthening economic conditions," noted ARCT Chairman Nicholas S. Schorsch. "Capitalization rates are stabilizing and there’s a lot of volatility in the market, so the net-lease space is viable and strong, because the general market is looking for yield."

Schorsch told CoStar the most unique thing about his company is that it’s a net lease REIT focused on investment-grade tenants, with the durability of portfolio and the income stream that it brings.

Indeed, many of the new players are attempting to exploit market niches through the REIT structure.

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With market fundamentals for many property types and markets not yet strong enough to attract private investors, many of the new REITs are focused on non-traditional businesses, like net leases, sale-leasebacks, and even broadcasting towers, offering skittish investors a variety of specific CRE investment options whiel affording the flexibility of a publicly traded security.

"Current REIT candidates have predecessor companies with a quantifiable track record, which is important in these volatile economic times as investors are more likely to invest in follow-on offerings of REITs with proven management than risk investing in something new," noted Susan Persin, in commentary for Trepp REIT Café.

Schorsch certainly has one of those track records, having led both traded and non-traded REITs over the last two market cycles.

ARCT’s tenants include FedEx Corp., Walgreen Co. and CVS Caremark Corp., among many others. As of Jan. 31, 2012, the company's property portfolio was 100% occupied and consisted of 485 properties located in 43 states and Puerto Rico. The company owns its properties through American Realty Capital Operating Partnership LP and owned nearly all of the outstanding operating partnership's units as of Dec. 31, 2011.

The company will contribute the proceeds of the offering to its operating partnership in exchange for operating partnership units.

Many non-traded REITs, which have a total of $80 billion in assets, have been accumulating assets over the last five years and have very large portfolios, with investors receiving higher yields in exchange for limitations on their ability to cash-in their investments. Nearing the end of their investment cycles, many investors are looking for liquidity through a sale, merger or public offering, Schorsch said.

In other CRE-related REIT formation announcements in the first two months of 2012:

  • Malkin Holdings LLC, which controls the Empire State Building, plans to convert the iconic tower's ownership into a public REIT through a public offering looking to raise $1 billion. The group of private held companies will be consolidated into a REIT called Empire State Realty Trust Inc., which will list shares on the NYSE under the ticker symbol ESB. In addition to the famous centerpiece of the portfolio, the REIT will include total holdings of 18 office and retail properties, a development site and five related management companies.

  • Select Income REIT, a Newton, MA-based company with 228 leased properties in Oahu, Hawaii and 23 in the mainland US, announced Feb. 27 it plans to offer 8 million shares at between $21 and $23 a share for a mid-point value of $176 million. The company, a wholly owned subsidiary of CommonWealth REIT (NYSE: CWH) which registered for its own IPO on Dec. 22, was formed to primarily own and invest in net leased, single-tenant properties. It will use proceeds to pay part of a $400 million note due to CWH. Select Income REIT plans to list on the NYSE under the symbol SIR. Underwriters include Morgan Stanley, BofA Merrill Lynch and Wells Fargo.

  • W.P. Carey & Co. LLC (NYSE:WPC), a publicly traded corporate, announced plans in February to convert to a publicly traded REIT. It will acquire its non-traded REIT affiliate, Corporate Property Associates 15 Inc., and expects the change in structure will help increase its market share and improve access to capital. The deal values CPA 15 at $2.6 billion, including $1.2 billion in assumed debt.

  • Rouse Properties, Inc. (NYSE: RSE) debuted as a publicly-traded regional mall company in January. The New York City-based company on Feb. 21 announced the completion of its first purchase as a public company, the Grand Traverse Mall in Traverse City, MI.

  • American Tower Corp., a wireless and broadcast communications infrastructure company, merged with and into American Tower REIT, Inc. (NYSE: AMT) on Jan. 1, 2012, becoming one of the first infrastructure asset firms to form a publicly traded REIT.

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