Bold Investors Venture Back Into REITs

By LINGLING WEI and PETER LATTMAN Most publicly traded vehicles that invest in mortgages have plummeted toward extinction, but some big names are trying to line up money to buy battered real-estate debt. Private-equity giant Leon Black's Apollo Management LP and distressed-investment specialist Angelo, Gordon & Co. have held discussions with investment banks about raising capital through mortgage real-estate-investment trust offerings, according to people familiar with the talks. Representatives for Apollo and Angelo Gordon declined to comment. Apollo's Leon Black and Starwood's Barry Sternlicht, above are among financiers looking to raise money to invest in battered real-estate debt. Fidac, the investment-advisory unit of Annaly Capital Management Inc., by far the most successful home-mortgage REIT in the U.S., is trying to raise $500 million for a REIT that would invest in debt used to finance office towers, shopping malls, hotels and other commercial property. Such assets are becoming increasingly attractive to bargain-hunting investors, who also are drawn to the low-rate financing being offered by the government on mortgage debt now held by banks. Those incentives are available through the federal Term Asset-Backed Securities Loan Facility and Public-Private Investment Program. "Conceptually, it's a terrific idea, as the new REITs are starting with a clean slate, no legacy assets and no debt," said Barden Gale, chief executive at real-estate investment firm J.E. Robert Cos. in McLean, Va. The biggest question, he said, is whether "these REITs will deliver the returns" to investors to compensate them for the risks they are taking on. REITs that own debt act like leveraged bond funds, making money if the yields on their investments exceed their borrowing costs. During the past two years, most established mortgage REITs were clobbered by the credit crisis, with the number of mortgage REITs shrinking to 19 from 38 at the end of 2006, according to the National Association of Real Estate Investment Trusts. The sector's total stock-market value has declined to $15 billion from $29 billion. So far, investors seem lukewarm about a new crop of mortgage REITs. Invesco Mortgage Capital Inc. was taken public last week by Atlanta-based fund manager Invesco Ltd. at $20 a share, but underwriters reduced the size of the offering to 8.5 million shares from 20 million shares. On Thursday, the stock rose 12 cents, or 0.6%, to $19.62 in 4 p.m. composite trading on the New York Stock Exchange. Mark Armour, head of Invesco's institutional business, said the company sees "very good opportunities" in buying mortgage debt, and the REIT gives Invesco better access to retail investors than a private-equity fund. Many individual investors find REITs attractive because of their high dividends. REITs pay no corporate income tax as long as they pay 90% of taxable income to investors as dividends. Some analysts worry the market for beaten-up mortgage assets won't be large enough to generate sufficient returns. Meanwhile, the Public-Private Investment Program, known as PPIP, has hit snags that are likely to scale back the government's ambitions to buy bad loans and toxic securities from banks. But the clobbered real-estate prices across all types of commercial and residential real estate are impossible for some investors to resist. On Tuesday, Colony Financial Inc., a new investment vehicle set up by Colony Capital LLC, a private-equity firm started by Thomas Barrack, filed for an initial public offering to raise $500 million to buy distressed commercial real-estate debt and other assets. Earlier this month, Barry Sternlicht's Starwood Capital Group filed a $500 million initial public offering for Starwood Property Trust. PennyMac Mortgage Investment Trust, run by former Countrywide Financial Corp. President Stanford Kurland, filed in May to sell $750 million in common stock. The stock price of a previous foray by Mr. Sternlicht into mortgage REITs, iStar Financial Inc., has fallen about 94% in the past two years. Write to Lingling Wei at lingling.wei@dowjones.com and Peter Lattman at peter.lattman@wsj.com