KKR preps $839m REIT IPO

The storied leveraged buyout firm is offering stock in a new real estate investment trust—and scoring a 25 percent carry in the process.

Leveraged buyout firm Kolhberg Kravis Roberts plans to raise up to $839 million (€692 million) in an initial public offering for its new real estate investment trust, according to filings with the Securities and Exchange Commission. Shares of the REIT will be priced between $23 and $25 each and listed on the New York Stock Exchange under the symbol KFN.

According to the SEC filings, the REIT will command a 25 percent carried interest fee, as well as a 1.75 percent management fee levied on a proportion of equity.

KKR Financial Corp., the San Francisco based real estate investment arm of the LBO giant, already has $6.3 billion in assets and securities after raising $780 million last year through a  private placement arranged by Friedman Billings & Ramsey.

KKR already has a history of real estate-related investing via its private equity funds, including the acquisition of Red Lion Hotels and KSL Resorts. Earlier this spring, the firm partnered with Bain Capital and Vornado Realty for the high-profile Toys ‘R Us buyout, a $6.6 million deal seen by many as at least a partial real estate play.

Under current law, KKR would not be able to use the new vehicle for to expand upon their traditional LBO activities.

“The benefit of a REIT is there is generally only one level of tax, the shareholder tax,” said Errol Halperin, senior partner and REIT specialist in the Chicago office of law firm Piper Rudnick. “The corporate tax is generally eliminated.”

The benefit of a REIT is there is generally only one level of tax, the shareholder tax.

Errol Halperin, partner, Piper Rudnick

Halperin added that a significant percentage of a REIT’s assets must be in real estate—and a significant percentage of its income must come from real estate—to avoid losing the REIT status and being taxed as a corporation.

Bob Lee, an attorney with Jones Day and head of the firm’s Real Estate Funds practice, pointed out one complication a private equity firm might face in launching a REIT: the fact that REITs must remain investment vehicles to enjoy the benefits of their special tax status.
Lee said the vehicles would be hit with a 100 percent excise tax on sales of “dealer” property, which is “a risk if properties are considered to be held primarily for sale in the ordinary course of the fund’s business.” This makes quickly selling off the less desirable assets in an acquired portfolio of properties—a long-time standard procedure in private equity real estate funds— generally a risky move which must be considered carefully.

Speculation about the REIT offering began in April, when KKR said they planned an $800 million REIT IPO. But this is not the firm’s foray into the public markets. Last year, KKR filed a registration statement for a business development company that would make debt and equity investments in public companies, but plans for the $750 million BDC IPO were shelved as concerns were raised by investors about the valuation of the vehicle.

KKR is not alone in attempting to bring public capital into private equity. A number of other established firms tried raising IPOs for BDCs in an attempt to tap into a permanent capital source, but were met with little success. New York-based Apollo Advisors was one of the few private equity firms to get a BDC off the ground.