Smaller REITs Will Bring Liquidity To Acquisition Market
A lot can change in just a few weeks. Last month we reported that Legacy Healthcare Properties Trust, a newly formed REIT, had tried to price its IPO in late August at $20 per share but ran into a few stumbling blocks, not the least of which was the number of people still on vacation while the market was tanking. The lead bank, Jefferies & Company, postponed the offering and went back to the market to determine what would work.
The new offering, which is now expected to be priced in the second week of October, includes 8,750,000 shares at $18.75 per share plus a small number of shares to be sold to management at the same price. The big difference—and it is significant for a REIT IPO with no assets on its balance sheet yet—is that purchasers of the IPO are being offered warrants that provide some downside protection in the event Legacy’s shares should drop in the 30 days immediately following the offering. It is a sliding scale, so that if the average price per share is $17.00, then investors would receive 0.425 of a warrant, with a full warrant entitling them to purchase one share at $18.75 per share for up to five years. If the average price is $15.75 or lower, then they would be entitled to one full warrant. This seems like good initial downside protection for investors, as long as the share price eventually recovers (of course), and the five-year period is especially attractive.
It’s good for Legacy as well, which has applied to the New York Stock Exchange for the ticker symbol “LRP.” If the price does drop, the warrants will represent future equity when and if exercised, even though it may not be at an advantageous time or when the price is substantially above $18.75 per share. But that’s always the risk. Given senior management’s track record, they will always be needing additional equity for growth. The two key officers, Tom Hutchinson and Phil Anderson, grew the former CNL Retirement Properties to a $5 billion REIT before it was sold to HCP, Inc. (NYSE: HCP) in 2006, and we assume they are looking for a repeat, as will investors. If they are as aggressive as they were in the last decade, they will provide some much needed liquidity to an acquisition market that has been starved of capital for the past two to three years.
We do not expect them to compete for the large portfolios that the more established REITs have been looking at, primarily because Legacy’s cost of capital will be higher and they would have a difficult time competing on price, not to mention they would need to raise a lot of new capital as well. That said, its platform acquisition is for a price of $240 million, or $230,000 per unit, for six properties in five states operated by Senior Lifestyle Corporation, which would continue as the manager. But Legacy needs a large transaction to get up and running, and they are not worrying about the price they are paying because in the scheme of their growth plans, it won’t matter much. So, if the past repeats itself, and Legacy gets its IPO done, we will be seeing a lot of acquisition interest from the Orlando-based company, and we suspect there will be a lot of one-off deals as well as small to medium-size portfolios. The market is in dire need of that kind of liquidity.
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