UPDATE – Retail Properties of America Inc. has priced its shares at $8.00 per share and will start trading on the New York Stock Exchange tomorrow. (4/4/12 10:00pm ET)
Retail Properties of America IPO
Retail Properies of America is a real estate investment trust that operates over 270 properties in mostly shopping centers. It is one of the larger IPOs to go public in the past couple weeks trying to sell 31.8 million shares at a price range of between $10 and $12 per share under the ticker symbol RPAI. The underwriters are include J.P. Morgan, Citi, Deutsche Bank Securities, Keybank Capital Markets and the Co managers are – Scotiabank, Wells Fargo Securities, PNC Capital Markets.
Retail Properties of America’s Business
Retail Properties of America is the largest owner and operator of shopping centers in the United States. Their 270 plus properties are located throughout 35 states and some of their tenant’s include Home Depot, Wal-Mart and Best Buy.
Real Estate Investment Trusts
Real estate investment trusts are a very specific type of company, sometimes called REIT’s, which are taxed differently than a typical corporation. One of the factors to qualify for tax breaks is that the REIT distributes 90% of it’s taxable income in shareholder dividends per year. REIT’s are allowed to pay 100% of their taxable income out in dividends, however in the case of Retail Properties they require that income to help pay off debt. Therefore they will be required to pay income taxes on 10% of their taxable income. Those distributions are sole decision of the RPAI’s board of directors.
Retail Properties of America also has a significant number of common stock issued. Over 194 million shares are outstanding which could be sold following the offering, which would severely depress the stock.
Tenants as large as RPAI leases to, carry an inherent risk of massive store closings or worse a bankruptcy. Retail Properties of America claims to have dealt with this very well in 2008 when they lost 3.2 million square feet of rented space when Mervyns, Circuit City and Linens ‘n Things all went out of business. They were able to lease about 2.3 million square feet of space, mostly to existing tenants, by December of 2011.
Highly Competitive Real Estate Business
Unlike a lot of businesses, it is very difficult to identify one or two directly competitors. Instead, Retail Properties of America considers other real estate investors, pension funds, insurance companies, foreign investors, real estate partnerships, private investors and other REIT’s all as direct competition.
However, companies with similar businesses to RPAI stock would be Regency Centers Corp (REG) who own 217 shopping centers in 24 states. Kimco Realty Corporation (KIM) which has interests in 946 shopping centers with over 138 million square feet of gross leasable area (GLA). And DDR Corp., (DDR) which owns 546 shopping centers in 41 states among others. Since its lows at the end of last November the Dow Jones Equity REIT Total Return Index is up 19.7%.
So where does this leave the Retail Properties of America IPO?
This is one of the most talked about IPOs to come out this week and may receive a pop its first day of trading. Also, other REITs have been doing well this year and because the have to pay such high divedends to investors it makes the stock more stable than a lot of other businesses. The REIT business is however, extremely sensitive to interest rates and a higher interest rate environment would be very detramental to Retail Properties of America and all REITs. Couple that with the high number of outstanding shares and future sales or the perception of future sales and the stock may not be strong in the long term.
AssetInvesting.com does not have a position in any of the stocks mentioned in this article, nor do we intend to open one within 72 hours of publishing it.