REIT - May/June 2010

of the finance slack once held by banks. “Currently, a private market for real estate doesn’t exist, so blind pools remain viable,” he says.

Colony Financial, Inc. (NYSE: CLNY ), a blind-pool mortgage REIT located in California, went public in the fall. According to Colony’s CFO, Darren Tangen, the company has benefited from the dislocation in the real estate and debt markets. “Colony is in a perfect position to continue acquiring distressed loans and originating new ones, because so much of the debt market remains stuck,” Tangen says.

To date, it has been pretty simple to file with the Securities and Exchange Commission (SEC) for blind-pool IPOs, where audits, financials and even three-year histories are not generally disclosed. One such transaction was the recent offering of Jon Bortz’s Pebblebrook Hotel Trust (NYSE: PEB). In the filing, Bortz listed only himself as the principal.

“IPOs like Pebblebrook and Colony Financial were really just amalgams of cash and high-profile real estate people behind the transactions, and that’s been good enough for the markets right now,” Cicco says.

Pebblebrook’s CFO Ray Martz notes that, while the company targeted a $350 million capital raise, its offering was oversubscribed, bringing in more that $400 million with the IPO. “Thus far, our offering has been very well received, and we have an enviable roster of the top REIT dedicated investors in the space,” he says.

Martz says he is not a fan of the term “blind pool” and prefers “start up.” Whatever you want to call it, his company is now armed with an arsenal of cash and set to go on a buying spree for distressed hotels.

Yet, the challenge facing Martz and other blind-pool management teams has proven to be finding appealing deals in a market where there remains a distinct gap between buyers and sellers.

“Investing capital right now in a market that’s not transacting seems to be a real problem,” says Glenn Mueller, professor with the Franklin L. Burns School of Real Estate and Construction Management at the University of Denver.

However, Martz said barring any unforeseen catastrophic events, he feels the company is positioned very well as a cash buyer without the issues that many legacy REITs face, such as sparse liquidity and overt debt. He also says Pebblebrok doesn’t face the potential to fall prey to what he describes as “the slowest moving train wreck of all in commercial real estate,” commercial mortgage-backed securities (CMBS). With billions in commercial loans set to mature in the near term and refinancing extremely difficult to find for many owners whose properties are below the waterline, CMBS remains one of the industry’s greatest challenges.

In contrast to Pebblebrook, Terreno Realty Corporation (NYSE: TRNO), a blind-pool REIT targeting industrial real estate, got off to a rocky start. In January 2010, the company was forced to delay its IPO. Then, when Terreno’s shares hit the market in February, the offering generated $175 million, roughly half of what the company anticipated.

Optimism about Terreno’s long-term prospects does appear to be building, though. After quickly dropping from its initial price

25

20

15

10

5

3

808

30

Historical REIT IPOs

29

Number of IPOs and Amount Raised ($mil)

11

9

8

5

4

2

2,646 7,980 3,789 491 2,271 1,820

2,990 905

2002 2003 2004 2005 2006 2007 2008 2009 2010

of $20.00 per share to $18.00 at the closing bell in its first day of trading, the stock price had rallied to roughly $19.60 per share near the end of March.

Because Terreno top executives Blake Baird and Mike Coke are formerly of AMB Property Corp. (NYSE: AMB), many insiders believe they will be able to piece deals together based on their past performance. Analysts at KeyBanc Capital Markets recently initiated coverage of the company, rating the stock a “buy” with a share price target of $23.00.

Is the Pool Party Over?

Despite whatever successes companies like Terreno and Pebblebrook have had, some observers are speculating that the blind-pool movement is on its last legs. Count Dan Fasulo, managing director at Real Capital Analytics, among that group.

“The distressed wave that many of these purveyors of blind pools were banking on didn’t materialize and won’t materialize because Washington created many opportunities, so lenders didn’t have to liquidate their portfolios,” Fasulo says. “Many of these blind pools are sitting on a mound of cash now and have some hard decisions in front of them. The ‘generational opportunities’ that many of them promised investors won’t materialize.” Michael Hudgins, vice president and global REIT strategist at J.P. Morgan Asset Management, agrees. “When the market believed that we would see distress with a capital ‘D,’ blind pools made a lot of sense,” Hudgins said. He added that investors were willing to wait months or years for return on their investment until that capital could be put to work because the opportunities were believed to be so phenomenal. “However, expectations are now that distress, if we see it, will be with a lowercase ‘d’ and the