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'They Are Literally Exploding Right Now': The Rise Of Blank Check Real Estate Companies

Special purpose acquisition companies, known as SPACs, have been all the rage in the financial world this year. Now, they are starting to become en vogue in commercial real estate.

"Today, three SPACs went public," former hedge fund portfolio manager Neil Danics, who tracks SPACs for the website he founded, SPACAnalytics, said Wednesday. "They're literally exploding right now."

There were 59 SPAC IPOs in 2019, which raised a combined $13.6B. So far this year, according to Danic's data, there have been 60.

A SPAC is a shell company that is set up to go public, even though it doesn’t have any operations. Money poured into these “blank check companies” by shareholders is used to acquire another company, thus taking it public in a reverse merger. After the acquisition, the company is usually listed on one of the major stock exchanges.

Just in the last few weeks, a SPAC called PropTech Acquisition Corp., acquired Porch, an online real estate and home improvement marketplace, for $523M after the SPAC raised $172.5M in a November IPO. An offshoot of Miami-based Lionheart Capital filed paperwork with the Securities and Exchange Commission specifying that it intends to raise $200M to acquire a proptech company. Benchmark Real Estate Group is likewise looking to raise up to $200M for a SPAC called Property Solutions Acquisition Corp. that would target property technology or real estate service firms.

Proskauer Senior Counsel Lily Desmond said regulations prohibit SPACs from having discussions with specific target companies in advance of an IPO, so a SPAC initially announces only the sector that it is interested in. Proskauer released a 2020 SPAC IPO Study Wednesday.

"When you buy into a SPAC IPO, a lot of the decision is based on the reputation of the management team," Desmond said. "You don't know what they are going to acquire. Knowing how many huge players and how many known names, strong names are in real estate, I could see it being a strong sector [for more SPAC interest]."

Mitchell Nussbaum, vice chair of New York law firm Loeb & Loeb, has helped "hundreds and hundreds" of clients set up SPACs over 20 years, he said. He has seen their popularity wax and wane.

"There were a couple in the '90s," Nussbaum said. They spiked in the early 2000s but hit a wall as liquidity dried up with the 2008 financial crisis.

Over the next decade, some notable SPACs went public. Burger King was taken private, then run through a SPAC to go public in 2012. Now-Commerce Department Secretary Wilbur Ross launched a SPAC in 2014 that he used to buy a chemical company, Nexeo. But in the past few years, they have ramped up because of growing interest from private equity and institutional investors.  

Danics said that SPACs gained legitimacy and attention when Goldman Sachs waded into the market three or four years ago.

"The appeal of the SPAC from the investor's point of view is that it's a win-win," Danics said. "The investment is always protected. If they don't like the company being acquired, they can always say 'No, thank you' and get their money back."

SPACs will usually issue units, rather than shares, in their IPO because of their unusual structure. These are usually priced at $10 per unit, which gives investors a common share, plus a fraction of a warrant that entitles the owner to buy additional shares.

Cash raised in a SPAC IPO goes into a trust, where it earns interest until the merger is completed, according to Barron's. For investors, it is nearly risk-free to buy a SPAC’s shares when they’re trading at a discount to the cash in its trust.

SPACs typically have two years to make an acquisition or else be liquidated. Billionaire hedge fund manager Nelson Peltz in 2010 had to return $900M raised through a SPAC after he couldn't find worthy acquisitions. But the Proskauer report found that, of SPAC IPOs priced from 2016 through 2019, over half have completed an initial business combination, and only 5% returned funds to investors and wound up operations.

Starwood Capital Chairman Barry Sternlicht speaking at a Bisnow event in 2018.

Last year, a SPAC run by venture capitalist Chamath Palihapitiya bought a 49% stake in Virgin Galactic for $800M. A SPAC backed by Apollo Global Management is buying Fisker, an electric car company, for $2.9B. In December, another SPAC acquired digital sports and entertainment company DraftKings in a three-way deal valued at $3.3B. 

This spring, Starwood Capital founder Barry Sternlicht raised $600M in a SPAC called Jaws Acquisition, though it doesn't intend to pursue real estate assets. Billionaire hedge fund manager Bill Ackman in July raised $4B through the SPAC called Pershing Square Tontine Holdings, with some speculating he will use it to buy Airbnb.

Proskauer partner Daniel Forman said that while tech is hot, more pure real estate plays could be targeted by SPACs — even REITs could theoretically be acquired. For private companies looking to go public, a traditional IPO route would require them to work on valuation with investment banks, file with the SEC and go on a two-week roadshow.

"There can be so many volatile events in that period," Forman said.

Being acquired by a SPAC still requires thorough scrutiny and disclosures, but can insulate a company from some of that volatility, he said, especially this year with a pandemic and an election. Of course, SPACs have their critics.

“This is just another warning signal we should be cognizant about in an ever-frothier market,” Jeffrey Berman, general partner at real estate-focused venture-capital firm Camber Creek told The Wall Street Journal.

Financial analyst Byrne Hobart, writing in Marker, said SPACs are for those who think the normal IPO process is too slow and want to cash in on the hype.

"The SPAC is the Vegas wedding chapel of liquidity events," Hobart wrote. "It seems like an urgently good idea at the time, but it doesn’t always turn out that way."  

Danics said that Wall Street by its nature will continue to churn out SPACs if there continues to be investor demand for them.

"With a huge supply of SPACs getting ready to go public, there definitely could be a situation with a lot of supply of SPACs looking for a company to bring public," he said. "Am I worried? No, because of the inherent safety, I don't think investors will ever get hurt by them. They might just get bored if the SPAC doesn't find anything. I prefer boring to losing money."

Contact Deirdra Funcheon at deirdra.funcheon@bisnow.com