Commercial Real Estate Direct Staff Report

Publicly traded REITs raised a total of $28.3 billion this year by selling unsecured debt and common equity.

The total includes 30 unsecured notes issues totaling $11.4 billion and 59 stock offerings totaling $17.2 billion.

That compares with last year, when REITs raised only $16 billion of unsecured debt and common equity.

Most REITs used the capital they raised to address upcoming maturities.

At the end of last year, for instance, the 50 largest REITs by total market capitalization faced a whopping $20.4 billion of debt maturities in 2009. As of the end of September, those REITs had whittled that down to a more manageable $2 billion. The latter doesn't include the $3.6 billion of maturities that General Growth Properties faced this year. The company, as part of a restructuring plan, has reached agreements to extend some $10.3 billion of its debt.

And despite the fact that the stock offerings averaged 23.41 percent dilution to existing shareholders, investors swallowed them up. Most of the issuers' shares have traded at higher prices than before their stock offerings, as evidenced by the 13.5 percent increase in a widely followed REIT price index.

Some companies have used the market's hospitality to build up war chests.

Simon Property Group was first to test the unsecured debt market last March when it priced a $650 million issue to yield 10.75 percent. Since then, the market has thawed substantially. Simon tapped the market again in August, pricing a $500 million issue at a yield of 5.46 percent. The company has also raised $1.7 billion of equity through the sale of common shares.

The company has amassed a nearly $7 billion war chest of cash and capacity on a credit line, which it is expected to use to opportunistically acquire properties. It already has agreed to buy the Prime Outlets affiliate of Lightstone Group in a deal valuing the company at $2.3 billion.

The relative ease with which REITs were able to raise capital could explain the ballooning volume of proposed initial public stock offerings for prospective REITs.

But unlike in the past, where developers and other sponsors tapped the public markets to monetize their existing investments, most if not all of the proposed REITs are essentially blind pools. In other words, they're looking to the public markets for capital that they could then invest opportunistically. Their pitch: the market's downturn has resulted in a once-in-a-lifetime investment opportunity.

In recent months, 22 REITs launched efforts to raise a total of $8.3 billion of equity. Some have already priced, while others have been postponed.

Perhaps the only screaming success so far was Starwood Property Trust, which was first out of the IPO gate. It had filed to raise $500 million and ended up raising nearly double that amount when it priced its offering on Aug. 12.

Other proposed REITs with similar modus operandi - pursuing mortgage and other debt investments - haven't fared as well and either raised substantially less than projected or were shelved entirely. Their fate might be correlated to the difficulties with which investors have been able to buy assets, either loans or properties, as current owners are still loathe to lower their prices to market-clearing levels.

But that hasn't deterred other potential sponsors, especially those with impressive track records, from trying to tap the market for capital.

Jon E. Bortz, the founder and recently retired chairman of LaSalle Hotel Properties, for instance, raised $402.5 million for his Pebblebrook Hotel Trust. The company managed to sell shares when other similar companies have failed, and the thinking is that Bortz' track record played a big role.

Other big-name players who have decided to take the Bortz route: Timothy H. Callahan, former chief executive of Trizec Properties and Equity Office Properties Trust, who is looking to raise what could be $500 million for Callahan Capital Properties Inc., which would invest in class-A office properties, and Richard S. Ziman, former head of Arden Realty Inc., which is looking to raise what could be $400 million through Halvern Realty Inc. that would be invested in Southern California office buildings.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.