An Introduction to REITs Bud and Gordon Jr. have a problem, albeit one that many might envy. They have built an impressive real estate portfolio over the years, initially through smaller funds with backing from friends and family and then larger funds with institutional limited partnerships, as well as secured debt financing. The co-founders believe there is value in their platform and management company (Bluestar Management, LLC) and want to continue pursuing attractive investment opportunities, but have tired of the process of raising private funds and want to be able to raise capital more quickly and efficiently. They also believe they could lower their cost of debt financing by having all of the properties consolidated under one company rather than in multiple separate funds. And although they have supportive partners, some are looking for liquidity, while others want to stay invested and not trigger taxes. What are the co-founders to do? They could stay the course, refinance existing debt, roll some partners into new funds, and cash out others; sell the management platform and the entire portfolio; or explore other alternatives. See “The Likely Alternatives.” One option that is near and dear to the hearts of these MoFos is the REIT IPO. A REIT is an investment vehicle designed to allow investors to pool capital to invest in real estate assets. REITs have certain advantages over other investment vehicles; in particular, a REIT is not subject to corporate level U.S. federal income tax on the taxable income that it distributes to stockholders, even if its equity is publicly traded. REITs perennially remain attractive to investors for this and other reasons. Investors seeking current income through regular distributions choose to invest in REITs because REITs must distribute at least 90% of their taxable income to maintain REIT status. To generate cash flow to make these required distributions, REITs generally finance their activities through equity and debt offerings. Although there is an active private market for REIT securities, REIT sponsors often have chosen to pursue IPOs. The industry and asset focus of REITs is diverse. Most broadly, there are equity REITs and mortgage REITs. Equity REITs primarily own interests in income-producing real property that is leased to tenants. Equity REITs typically concentrate on a market segment (e.g., office, self-storage, retail, commercial, residential, industrial or data center properties, among others) or a specific industry segment (e.g., healthcare or lodging properties). Mortgage REITs typically focus on originating or acquiring loans made to certain types of real estate borrowers (e.g., loans made to developers or distressed borrowers) or on particular loan types, such as first mortgages, distressed debt, or mezzanine financings. Although it is not unusual for REITs to invest in multiple property types, there are relatively few hybrid REITs that, in the ordinary course of executing their investment strategy, invest substantially in both operating real property and debt instruments secured by interests in real property. Mortgage REITs do, however, often invest in net lease assets. 1 | 2024 Guide to REIT IPOs and Listing Transactions
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