REITs: The Rising

, The American Lawyer

In 2010 the real estate investment trust sector jolted back to life. Market capitalization spiked 44 percent, to $389 billion--driven both by rising share prices and $47.5 billion in new capital (an increase from the $34.7 billion raised in 2009)--from public markets. Attorneys played a key role in funneling this new money, which came in the form of $26.3 billion from 108 follow-on offerings and $2 billion from nine initial public offerings, into the industry. Last year the sector also raised $19.2 billion from 56 unsecured debt offerings, according to the National Association of Real Estate Investment Trusts.

In total there were 173 initial, follow-on, and debt offerings in the REIT sector in 2010, which represents a 33 percent increase from 2009. "Public REITs were successful in 2010 in repositioning their balance sheets by raising capital through secondary offerings, selling assets, and paying off debt," says Edward Schneid­man, a partner at Mayer Brown, which has represented the industrial space REIT ProLogis in several deals over the years.

Initial public offerings were also a bright spot as activity kept pace with last year. (In 2009, nine IPOs were completed, but in 2008 just two IPOs were completed.) Lawyers benefited from the new offerings; the hours necessary to complete a typical IPO for a REIT that contains properties are much greater than for a standard follow-on offering. "We were very busy with IPOs last year, which showed they were back," says Michael Brody, a partner at Latham & Watkins. His firm represented either the issuers or investment banks involved in four IPOs last year.

But there were signs that the REIT industry has not completely shaken off the economic downturn. According to Hoover's Inc., last year nine REITs filed to go public with the Securities and Exchange Commission, but have yet to start trading.

Still, while public market REITs may not have fully recovered from the economic downturn, they have benefited from the slower recovery of other sectors of the economy. Four years ago, the industry's market capitalization fell (it plunged to $192 billion in 2008), partly because trusts went private and private buyers had snapped up a large quantity of properties. But over the past couple of years, that trend has reversed. Public markets have emerged as an attractive alternative for private owners. However, while IPO activity remains relatively strong and market capitalization is up, deal activity has been stymied as buyers hold out for rock-bottom prices. "There hasn't been the wave of bargain auctions that people thought there would be two years ago," says James Hanks, Jr., a partner at Venable. "A lot of REITs that set aside [money] for potential bargains are still looking."


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Illustration by Eva Vazquez