NEW YORK Investors looking to take advantage of the recovering U.S. housing market have flocked to large public offerings from industrial companies despite the sector's high debt load and modest growth.
Propelled by a stock market rebound as well as an uptick in private equity firms looking to exit old investments, five industrial companies went public and raised proceeds of $1.2 billion in the first quarter, up from two companies and proceeds of $769.5 million a year earlier, according to Thomson Reuters data.
Taylor Morrison Home raised $628 million in its IPO earlier this month, while fellow builder TRI Point Homes Inc's offering fetched $233 million in January. Other industrial IPOs include $248 million for wood product maker Boise Cascade Co in February.
Construction supply business HD Supply filed for a $1 billion IPO earlier this month. Other deals expected later this year include aluminum products maker Constellium, door manufacturer Masonite International Corp and builder William Lyons Homes.
"The reason we're seeing the industrials sector pick up is really because of macro trends like an increased level of confidence in U.S. GDP growth, manufacturing, and ultimately corporate earnings," said Warren Estey, head of industrials, metals & mining at Deutsche Bank AG's equity capital markets group.
While the buoyant equity markets have encouraged public offerings across the board, growth-oriented investors have generally considered the industrial sector less attractive than tech or healthcare businesses, said Michael Santini, global head of Deutsche Bank's industrials group.
Now IPO investors are becoming more receptive to buying into industrials, given the cyclical recovery in housing and other markets as well as the ability of these companies to generate stable cash flow even in a slow-growing economy, Santini said.
That is also encouraging private equity firms to test the IPO market to exit their industrials investments.
Buyout firms often preferred to sell these companies to private buyers, which tend to value them at a higher price than public markets do.
That is starting to change, though, as investors are willing to look 12 to 24 months ahead for earnings growth, Santini said.
"Because of strong markets," Estey said, "we've heard (large institutional investors) say they're willing to pay a multiple that a strategic or private equity firm might pay."
Investors are looking to capitalize on a rebound in the U.S. housing market in particular, which was hit hard by the turmoil in the U.S. credit market in late 2007.
Low interest rates and rising rents have pushed many consumers to buy homes, prompting investors to look for ways to play the housing market.
Bankers also expect IPOs in industrial subsectors like shipping and infrastructure over the next year.
"Given the U.S. markets have shown more economic resilience than other parts of the world, combined with the housing market recovery and the expectation for nonresidential markets, we are having more active dialogues around industrial company IPOs this year than in the recent past," Santini said.
These IPOs have performed well too.
Shares of industrial companies that went public this year have risen 21.2 percent on average, compared with 9.1 percent for the Standard & Poor's 500 Index, according to Reuters data.
And the performance came even though some of these companies carried higher-than-average debt loads.
The average leverage ratio for private equity-backed companies looking to go public stood at around three and four times earnings before interest, tax, depreciation and amortization within the last four years, according to data provider Pitchbook.
HD Supply, however, carries a debt-to-EBITDA ratio of more than nine times.
But some investors have not been scared off.
"The economy has been bumpy over the last five years, but it's amazing how industrial companies have held up," said Kent Croft, chief investment officer at Croft Leominster in Baltimore, which has about $900 million under management.
"When you have a decent economy," Croft said, "just think about how well these companies can do."
(Reporting By Olivia Oran; Additional reporting by Soyoung Kim; Editing by Lisa Von Ahn)