With private equity becoming harder to raise, investors hoping to clean up from the mortgage market's wreckage are turning to a vehicle that has fallen in and out of vogue over the years: the real estate investment trust.
On Thursday, a REIT set up by Private National Mortgage Acceptance Corp. (PennyMac) raised $335 million through an initial public offering.
The company, which is run by former Countrywide Financial executives, said it plans to use the proceeds to buy distressed residential mortgage assets, something PennyMac has been doing through private-equity funds it manages since last year.
Gabe Poggi, vice president of real estate research at FBR Capital Markets, estimated that about a dozen other REITs with similar plans have filed IPO prospectuses in the past few months. They hope to buy commercial or residential loans or securities from motivated sellers (banks, the Federal Deposit Insurance Corp.) and to leverage financing from government programs (such as the Federal Reserve's Term Asset-Backed Securities Loan Facility and the Public-Private Investment Program).
Most of these REITs are arms of private-equity firms like Thomas Barrack's Colony Capital, and Barry Sternlicht's Starwood Capital Group.
Analysts said the REIT structure lends itself well to a business whose opportunities, though seemingly ample right now, are not going to multiply.
"A REIT structure is a mechanism to raise money around an idea that doesn't have growth," said Merrill Ross, an analyst at BGB Securities. "It's a tool that meets the need right now."
Resolving discounted loans "doesn't generate growth since they are a discounted asset," she said.
"A REIT structure is sometimes more efficient than a bank structure for a levered strategy."
REITs pay no corporate income taxes as long as they distribute 90% of their income to shareholders in the form of dividends.
In the earlier part of the decade, REITs were a fashionable way to take subprime lenders public.
The structure allowed companies like New Century Financial and American Home Mortgage Investment Corp. to hold some of the loans they originated in portfolio. (Both of those companies went bankrupt when the liquidity crisis began.)
"A REIT is simply the most efficient way to hold a real estate asset," said Matthew Howlett, a mortgage REIT analyst at Fox-Pitt Kelton Cochran Caronia Waller.
"If you pay a big dividend and get a premium to book, you can raise additional capital and create fees for the manager, so it all fits," he said. "It doesn't make sense" to hold these kinds of assets "in a taxable structure if you qualify for REIT status."
And right now, "It's much easier to raise capital in a public vehicle than a private one," Howlett said.Easier, but not necessarily a cakewalk.
The proceeds from the PennyMac REIT's IPO were 20% less than the company had aimed for, and the shares dropped 4.5% in their first trading day, to $19.10 a share.
Also, the influx of so many companies chasing the same assets could backfire, some analysts said.
"There's only a finite amount of assets that you can purchase that are eligible for government funds," Poggi said, adding that the government could "open some of the programs" to include other assets as well.
"If you have all these guys buying the same asset, at some point you price yourself out of the market and the return on equity isn't 15%. It's 8%."REIT status also may be temporary.
PennyMac said in its IPO filing that once it resolves its pools of troubled mortgages, the company will start originating mortgages and might convert to a C Corporation.