Vivek Seth is the head of the Raymond James Real Estate Investment Banking group, which is involved with public and private offerings and mergers and acquisitions within the real estate, hospitality and homebuilding industries. Prior to joining Raymond James in 2001, Seth was a senior member of the real estate investment banking group at J.P. Morgan.
2016 has been a slow year for REIT IPOs. Why is that, and do you expect a pickup in 2017?
We haven’t seen a whole lot of REIT IPOs because the markets have not been particularly receptive to IPOs, period. Overall, it’s probably been the worst market for IPOs on record since 2008/2009. In real estate, there’s been a shift to higher-cap, more-liquid names. As a consequence, new and smaller companies have had a hard time finding an audience in the public markets while simultaneously being able to source plentiful capital on the private side—probably more so than any other time in history.
IPOs have always been the lifeblood of the real estate sector. If you go back to the beginning of the Modern REIT Era in 1991, if it wasn’t for a steady stream of IPOs, we wouldn’t be closing in on $1 trillion of total equity market capitalization today. So, it’s always been a vital cog in the wheel.
With prices where they are now, there will be much more talk about IPOs. The reality, though, is that in the next year, we are going to see IPOs more in the fashion of merger-cos, rather than the traditional small-cap IPO model that has been prevalent for each of the last few cycles. If we catch a sustainable trend, only then will you see some of the small companies come up.
What are the ingredients for a successful IPO in the current environment?
You need to have a pretty clear line of sight to $1 billion as a minimum threshold, either because you are operating in a unique niche—but obviously that’s getting harder and harder as a variety of different types of companies are already public, and certainly with the tightening up of tax regulations—or you have a critical mass of assets. If stock price valuations continue to keep pace, then you are going to see the attractive arbitrage of taking a vertically integrated company public with well over $1 billion in assets.
Do you anticipate more mergers and acquisitions activity on the public-to-public side or on the private side?
If REIT prices continue to appreciate, then the segmentation between the haves and have-nots will continue, and you’ll see more public-to-public. You’re definitely going to see a steady stream of take-privates as well.
I’m quite optimistic on M&A activity overall. It’s going to be across the board. It’s more valuation differentials, rather than sector dynamics, that are going to drive the trend.
How big an impact are foreign real estate investors having on capital market flows?
They are having a huge impact. The demand for yield, particularly from overseas investors, is driving capital flows both on the public and private side, and I don’t see that abating any time soon. Overall, I think that it’ll be a pretty healthy market next year, absent something draconian from the Federal Reserve.
The Asian countries are clearly on the top of the list, with China in first place, followed by Japan. The global uncertainty continues to benefit us, and we’re going to see inflows from the Middle East and Europe as well. It’s just that the channels from Asia have been extremely well-established. I think we’ll see more volume from there because the conduits exist today.
Meanwhile, events like Brexit sustain the relative attractiveness of the U.S. The longevity of our markets and the attractiveness of the investments here are that much more ratified by an event of that nature.