Distressed real estate IPOs carry big timing risk

By Phil Wahba and Nick Zieminski
Posted by Rico K. Setyo

NEW YORK (Reuters) - Three companies backed by major investment firms plan initial public offerings this week to take advantage of distressed commercial real estate, but they face stiff competition and major risks if the market takes a long time to recover.

Apollo Commercial Real Estate Finance (ARI.N), backed by Leon Black's private equity firm, Colony Financial Inc (CLNY.N), and AllianceBernstein's (AB.N) Foursquare Capital Corp (FSQR.N) are collectively looking to raise $1.4 billion in IPOs set to price and debut this week.

The dislocation in the real estate and commercial mortgage backed securities (CMBS) markets has prompted several top investment firms this year to create REITS that will buy up, manage and originate commercial real estate loans.

But the funds face the risk that the space is getting increasingly crowded with many investors, including hedge funds, private equity firms and other asset managers, starting funds for distressed real estate investment.

That may mean the easy money has already been made and those arriving now will have to settle for lower potential gains.

They also must contend with a tentative economic recovery that could turn into a double-dip recession with a further threat to commercial property prices.

"The hope of a resolution from all the government stimulus programs has already shrunk the discounts on these assets," said Merrill Ross, an analyst with Arlington, Virginia-based broker-dealer BGB Securities.

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