By Courtney Darby

Now that Maguire and American Financial have tested the water, will other companies follow into the public market?

“I don’t see there being a wave of REIT IPOs, but there will be a few more over the rest of this year and next year, as a result of companies that have been building portfolios with a goal of going public at some point in the future.” —Mark Patterson

With Maguire Properties, Inc. (NYSE: MPG) and American Financial Realty Trust (NYSE: AFR) launching public offerings on the same day this June—the first offerings in the REIT industry since Newcastle Investment Corporation (NYSE: NCT) in October 2002—industry insiders questioned whether these were isolated instances or the start of a new wave of public REIT offerings.

Even though the industry has seen relatively few public offerings in recent years—five since the start of 2000, including the two most recent deals—Maguire and American Financial have been planning their moves to go public for quite some time.

In September 2002, American Financial slated June as its target date to go public, according to Nicholas Schorsch, president, chief executive officer, and vice president of the company's board. On its June IPO date, American Financial offered 56 million shares at $12.50 a piece, raising $700 million. Shares closed at $14.25 a share on the first day of trading. As of July 30, share price had risen to $14.38. The company said the proceeds of the offering will go toward paying off existing debt.

As for Maguire, the decision to go public has been in the works since 1997, according to Richard Gilchrist, president and co-CEO. Maguire also went public June 24, selling 36.5 million shares at an offering price of $19 each (which was also its first-day closing price). The offering raised just under $700 million, which will be used to pay off existing debt. As of July 30, shares were trading at $20.25.

Maguire Properties, Inc. Headquarters: 555 W. 5th Street Los Angeles, CA 90013 Tel: 213-626-3300 Web: www.maguirepartners.com NYSE: MPG Chairman and Co-CEO: Robert F. Maguire III President and Co-CEO: Richard I. Gilchrist Core markets: Southern California Property types: Office properties, hotels and parking garages

More to Come?

Reports in the financial media have speculated that Maguire and American Financial could be the forerunners for a possible influx of IPO activity.

The fact that Maguire and American Financial were the only two IPOs on the market in quite some time might have had something to do with the interest the media showed in these deals, analyst Greg Whyte of Morgan Stanley says.

Mark Patterson, managing director of Citigroup Global Markets, Inc., says, "These are two of the largest IPOs in the last 12 months for any industry on Wall Street—not just real estate, but any sector. There was a lot of interest in seeing how these large deals entered the market. As a result, they got a lot more publicity and press than IPOs five years ago, or even three years ago did."

Given the attention they received, will the recent offerings signal another run of REITs into the public market? Lou Taylor, senior real estate analyst of Deutsche Bank Securities, says any IPOs in the near future are likely to have been in the works for a while and not looking to capitalize on any short-term market factors.

American Financial Realty Trust Headquarters: 1725 The Fairway Jenkintown, PA 19046 Tel: 215-887-2280 Web: www.afrg.com NYSE: AFR Chairman: Lewis S. Ranieri Vice Chairman, President and CEO: Nicholas Schorsch Core markets: Florida, Virginia, North Carolina and California Property types: Bank branches and office buildings

"There was a big IPO surge between 1993 and 1998, and most private owners decided by then whether they would commit to being private or public," Taylor says.

While he admits there are likely to be other scattered offerings, Patterson doesn't see the recent IPO activity as the start of a larger trend.

"I don't see there being a wave of REIT IPOs, but there will be a few more over the rest of this year and next year, as a result of companies that have been building portfolios with a goal of going public at some point in the future," Patterson says.

Jackson Hsieh, U.S. managing director, global head of the Real Estate, Lodging and Leisure group at UBS, agrees that expecting a large number of IPOs is unrealistic. "The market is open for IPOs, but I'm not sure at the end of the day that it's for everyone. In the case of Maguire, there was a specific set of circumstances that made that IPO make sense—such as the need for re-capitalization. And American Financial, it was more a need for growth capital as opposed to re-capitalization."

However, the continued strong market demand for REIT stocks combined with the positive response to the Maguire and American Financial offerings could persuade some companies on the private-public fence to launch an IPO in the near future, according to Morgan Stanley's Whyte. He says it is important to recognize that REITs' price appreciation has been strong this year and because of that it makes economic sense for more private companies to consider going public.

"Do I think that we are going to see the same sort of bubble of IPOs and new company formations like we saw in the mid '90s? No. Do I think we could see more private companies considering entering the public domain? Yes," Whyte says.

Maguire's Gilchrist agrees with Whyte's notion that other companies could follow in the footsteps of Maguire and American Financial. "I have had discussions with other companies who are looking at this as a potential viable structure for the future; I think we will see more IPOs."

Recent REIT IPOs
REIT	Ticker Symbol	IPO Date	Number of Shares*	Amount Offering Price	$ Raised on IPO Date*	Share Price as of 7/31/03
American Financial Realty Trust	AFR	6/24/03	56.0	$12.50	$699.40	$14.91
Maguire Properties, Inc.	MPG	6/24/03	36.5	$19.00	$693.69	$19.25
Newcastle Investment Corporation	NCT	10/10/02	7.0	$13.00	$91.00	$19.58
Windrose Medical Properties Trust	WRS	8/16/02	5.6	$12.00	$67.20	$10.75
Heritage Property Investment Trust	HTG	4/23/02	18.0	$25.00	$450.00	$27.08
* In millions.
Source: NAREIT

Favorable IPO Market

While market timing isn't the predominant factor, the current condition of the market, and valuation and performance of other real estate equities are factors in a company's decision to proceed with an offering or not. And the majority of analysts and investment bankers Portfolio spoke with described the current market as favorable.

"I think the market has clearly signaled its receptivity to IPOs and companies that have good business plans and good niches in markets," Patterson says.

Hsieh agrees that the market is open to an offering by a high-quality company with good prospects. He added that as far as sectors are concerned, a unique asset type, or a good quality retail name would be a natural choice to successfully move into the public market.

“If you are going to come into one of the major property types you’ll need to be large and liquid, or you need to have some sort of angle on why investors would want to invest in your company— some twist on a frequently told story.” —Lawrence Gray

Going public could be an interesting opportunity for those in an asset type that is not very well represented in the public market today, according to Lawrence Gray, managing director and head of Real Estate Corporate Finance at Wachovia Securities.

"If you are going to come into one of the major property types you'll need to be large and liquid, or you need to have some sort of angle on why investors would want to invest in your company—some twist on a frequently told story," Gray says. "If you don't, you might want to think about merging into one of the existing public companies or just staying private."

Pros and Cons of Going Public

Regardless of the market conditions, going public is not the best strategy for every private company; the benefits vary depending on the type of company and usually involve raising new growth capital or re-capitalizing.

For Maguire, the benefits of going public were numerous; including providing the best opportunity to grow by accessing public capital, in addition to utilizing private capital, Gilchrist says.

American Financial saw its IPO as a natural extension of its business. "We feel it is ideal for us (to go public) because it allows us to use the public market to raise capital more freely, it has given us better visibility and enhances our product line," Schorsch says.

Jon Fosheim, principal, Green Street Advisors, says that moving from the private to public market is simply a matter of a company determining what's most beneficial for it going forward, as opposed to trying to time the broader market.

"The IPO business is one giant arbitrage. If you can get superior valuation for your business in the private market, then you stay private," Fosheim says. "If the valuations are better on the public side, you go public, discounting into that all the costs of going public. If you're in a situation where real estate companies are trading at a higher price on Wall Street than they are on Main Street, there's a temptation to lock that in, to monetize it by going public."

Given the time and costs involved, it is up to the management team to weigh the impact going public would have on a company and its shareholders. For a private company that wholly owns its properties, going public is approximately a three-month process, according to Gray. For a private company that has to negotiate institutional joint venture partners, like most of the IPOs in the early 1990s, it is more like a six to 18 month process, Gray says. As for costs, Gray says it varies, but a rule of thumb for estimating investment fees is 6 percent to 7 percent of the total amount raised. Legal fees typically range from $500,000 to $1.5 million, depending on preparation work and ownership structure.

"It's a question of whether it really fits into the management team's strategy for raising growth capital and do they want to go through the work to do an IPO," Hsieh says. "It's not easy to do."

Patterson agrees that management is a key component, but the desire to go public and operate under more strict regulatory rules factors into the ultimate decision.

"I think the issue is the number of companies out there that have the critical mass, and the desire to go public," Patterson says. "Plenty of companies that are private are high quality, but I don't know if there is a desire to go public because they have been able to raise private capital quite easily over the last couple of years."