U.S. REITs seeking billions in IPOs, follow-ons

By Phil Wahba and Ilaina Jonas

NEW YORK (Reuters) - Several large investment firms are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market, and more are on the horizon.

The planned IPOs, which include units of firms like Apollo Management APOLO.UL and Alliance Bernstein Holding LP, could be just the beginning of what some bankers expect to be a boom in Real Estate Investment Trusts (REITs) going public over the next few years.

The U.S. commercial real estate market has been reeling ever since a prime source of financing, the commercial mortgage-backed securities (CMBS) market, virtually closed and banks shut off their lending spigots in the past year.

"In the real estate world, the next few years will be defined by a lack of capital," said Michael Knott, a senior analyst with Green Street Advisors.

According to a recent Deutsche Bank report, as much as $40 billion will be needed to salvage about $420 billion of CMBS mortgages maturing over the next 10 years.

More recently, the sector has grappled with falling rents and rising vacancies driven by the recession.

The dislocation in the real estate and CMBS markets has prompted several top investment firms to create REITS that will aim to buy up, manage and originate commercial real estate loans.

"As assets start to come on the market and distress in commercial real estate increases, REITs will be the buyer of choice, and they will get bigger and bigger," said Brad Smith, managing director for equity capital markets at Bank of America Merrill Lynch.

With significant amounts of mortgages coming due in the next three years, there will be demand for loans that traditional players such as banks have been unable or unwilling to make.

In the past two months alone, eight REITs have filed for IPOs seeking to raise up to $3.9 billion, a larger pipeline than that of traditional IPOs, according to Thomson Reuters.

For instance, an affiliate of private equity firm Apollo Management last week filed for a $600 million IPO to take advantage of what it called a "void of several hundred-billion dollars" that must be filled by new mortgage lenders.

The newly formed companies were set up as REITs, a tax structure that exempts companies earning most of their revenue from either rent or mortgages from paying taxes on their taxable income if the company distributes 90 percent of that to shareholders.

TOXIC BUT INVITING

Other leading investment firms are trying to raise money to create REITs that will buy bad loans or CMBS, referred to as "toxic assets," on the cheap from the U.S. government.

Newly formed REITs affiliated to asset managers AllianceBernstein (AB.N) and Angelo Gordon & Co have in the past week applied for large initial public offerings in an effort to buy so called "toxic assets" under a U.S. government program. The AllianceBernstein affiliate is looking to raise $500 million.