By Brent Horak
After IPO activity slowed to a trickle in 2016, the capital markets community projects a more positive forecast for IPOs across industries in 2017. Two-thirds (67 percent) of capital markets executives at leading investment banks predict an increase this year in IPOs on U.S. exchanges, BDO’s 2017 IPO Outlook study found, with 19 percent predicting a “substantial” uptick.
For the real estate industry, the IPO market may be marching ahead at a more measured clip, continuing to face many of the same hurdles that contributed to the recent downward trend in REIT IPOs, from nine in 2013 to four in 2016. BDO found executives’ predictions for real estate IPO activity fell in the middle of the pack among industries, with 37 percent expecting IPO activity to increase in the sector and 31 percent expecting activity to remain flat in 2017.
Publicly traded REITs posted positive returns of about 8 percent in 2016. Although the asset class underperformed the broader S&P Index for the year, NAREIT predicts a stronger 2017 for REITs and commercial real estate, driven by continued economic momentum and increased demand. Nonetheless, the sector will also grapple with big questions—most importantly, the possibility of a downturn as the current real estate cycle progresses. National Real Estate Investor notes REIT IPO activity this year could vary significantly across sectors and property types. Some REIT sectors are currently trading at a premium to their net asset values, so IPOs could be concentrated by sector this year. Of course, the decision to go public will ultimately be influenced by how the share price stacks up to the REIT’s net asset value.
Let’s take a look at REIT IPO activity so far this year and the factors that will impact how the rest of the year unfolds.
In January, Invitation Homes raised $1.54 billion in its offering, the largest U.S. IPO since October 2015 and the largest REIT IPO since November 2014. The company issued 77 million shares at $20. As of mid-March, the shares were trading at $21.40. Private equity group Blackstone purchased Invitation Homes in 2012 and spent approximately $10 billion to build Invitation’s portfolio of 48,000 homes, CNBC reported. Invitation’s homes are now 96 percent occupied and draw an average monthly rent of $1,623, according to Forbes.
Though this IPO comes after other recent bets on rental homes, including the merger of Starwood Capital and Colony Capital to form Colony Starwood Homes in January 2016, the window for IPO activity in the single-family home sector may be closing. Housing prices have rebounded significantly since the recession, but remain slightly below their pre-recession peak. Currently, there are 11 private single-family home rental businesses that own more than 1,000 homes each. Performance in the single-family REIT sector was strong in 2016 with 26 percent returns. But as the housing market steadies, portfolios are no longer available at “bargain prices,” so selling to a peer may generate better exit opportunity than an IPO for those businesses moving forward, Forbes predicts.
Other REIT IPO activity so far includes Connecticut-based Mortgage REIT Sachem Capital and New York City-based Clipper Realty. Sachem Capital opened for trading this year on Feb. 10 at $4.90 for its offering of 2.6 million shares. Shares are trading at $5.00 as of mid-March. Clipper Realty also debuted on Feb. 10, offering 5.6 million shares priced at $13.50 per share. The shares have hovered around that price, increasing less than 1 percent.
With economic uncertainty ahead as legislative and regulatory policy play out under the new administration, it is difficult to know how the capital markets and IPO activity may be impacted. The real estate industry’s recovery is entering its ninth year, and all eyes will be on key measures such as vacancy rates and rent growth. Focusing on these measures alone, however, overlooks the strong sector fundamentals set to support growth for commercial real estate this year, NAREIT asserts. Notably, demand for leased space is outpacing supply despite an uptick in construction in recent years.
Healthcare, industrial, net lease and manufactured homes portfolios are performing particularly well in the current market as most REITs in those sectors are trading at premiums to their net asset value, according to National Real Estate Investor. Those types of portfolios may be particularly ripe for IPO activity this year. Last year was a challenging IPO environment with many companies electing to forgo a public offering. But if the cadence of REIT IPOs in Q1 is any indication, that sentiment is changing fast.
This article originally appeared in BDO USA, LLP’s “Construction Monitor Newsletter (Spring 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com