By Christopher M. Wright

NAME: Mark Decker TITLE: Managing Director and Group Head, Real Estate Investment Banking, Robert W. Baird & Co., Inc. BORN: 1948 EXPERIENCE: Decker moved to Baird, a middle-market investment banking and financial services firm with offices in the U.S., Europe, and Asia, in 2004 to establish the firm's real estate investment banking practice. Before joining Baird, Decker was a White House aide in the Nixon and Ford administrations, a managing director at Friedman, Billings, Ramsey, and founder of the real estate investment banking group at Ferris, Baker, Watts. He was the National Association of Real Estate Investment Trust's (NAREIT) president from 1985 to 1997. Decker received NAREIT's Industry Achievement Award in 1997.

Mark Decker, managing director and group head of real estate at Robert W. Baird & Co. and former CEO and president of NAREIT from 1985 to 1997, has a real sense of the REIT story. Even though REITs are no longer a fledgling industry, these are still early days in the securitization of real estate, he says.

Since joining Baird in 2004, Decker and his team have been involved in raising $5.1 billion for public real estate companies through 41 transactions, including 10 transactions as lead manager. Baird also provides services to public and private real estate companies, including merger and acquisition advisory, private placement of institutional capital, strategic advisory and fairness opinions.

Portfolio sat down with Decker to discuss his tenure in the industry and what lies ahead—a strong upcycle for REIT IPOs that, in his view, will be the next important industry trend. In a wide-ranging conversation, he lays out his winning formula for REIT IPOs, tells us why REITs should seek both institutional and retail investors, and underscores the risks of stockpiling dead money (e.g. carrying on the balance sheet excess amounts of capital that are not productively invested).

Portfolio: When you look back on the history of the REIT industry, what are your thoughts on how far this industry has come?

Decker: The industry has been through the Wild West gun slinging era and the ugly teenage years era. We survived the lending debacles in the 1970s, the tax shelter problem in the 1980s as well as the savings and loan crisis that threw real estate into free fall. The mid-1990s were about owner-operators correcting over-leveraged portfolios and recapitalizing their businesses through the REIT vehicle.

It's a different industry today. Transparency is here to stay. The public market is well established, but still has room for substantial growth. There is still tremendous opportunity to carry the securitization of commercial real estate further both globally and in the United States. The public market is still very young.

Portfolio: What accomplishments are you most proud of during your tenure as NAREIT president?

Decker: During that time, we recruited the best and brightest to be involved on NAREIT's board—Sam Zell of Equity Group Investments, Steve Roth of Vornado Realty Trust (NYSE: VNO), Milton Cooper of Kimco Realty Trust Corporation (KIM) and Barry Sternlicht, former CEO of Starwood Hotels & Resorts, among others—and we were able to modernize the REIT vehicle.

We successfully worked with Congress in 1986 to allow REITs to manage their own properties, which had been a huge barrier to owner-operators utilizing the efficient REIT vehicle and the public capital markets. In 1993, we succeeded in getting Congress to amend the "five or fewer" rule to encourage large U.S. pension funds, plan sponsors and other institutions to make larger investments in REITs.

We also laid the groundwork for much greater U.S. and international recognition of REITs by sponsoring REIT seminars for institutional investors, financial planners and securities analyst societies in Europe, Japan, Singapore and the United States.

Portfolio: There has been a lot of attention focused on the REIT merger and acquisition market, particularly involving private capital. What is the outlook for public offerings in the near future?

Decker: Regarding IPOs, I am a contrarian. There has never been a more opportune time for private real estate operating companies to enter the public markets.

As for follow-on offerings, REIT managements are generally pleased with where the public markets have moved their stocks over the past couple years and will raise capital if they can find a good use of proceeds. The capital is there, but finding compelling investments is the difficult part.

Portfolio: How do you see the wave of private capital acquiring REITs playing out?

Decker: Capital markets for REIT IPOs and secondaries continue to be cyclical. In 2006, there were five IPOs totaling approximately $2.3 billion versus approximately $66.2 billion of privatization and approximately $51.2 billion in public transactions. That makes me believe we're ready for a strong IPO cycle. It will be fueled both by strong first-time owner-operators going public and by private equity portfolios recapitalizing though the public markets.

Additionally, there's a tremendous amount of capital from these privatizations that is returning to institutions. Five years from now, we'll look back and say that today was clearly a high-water mark for privatizations.

Portfolio: We often hear about the "wall of capital" in real estate, but what has it meant in public capital markets?

Decker: Private capital is more entrepreneurial and very aggressive. Real estate can be a very inefficient market. Private capital can step in when these inefficiencies favor private market valuations and capture value from an arbitrage between public and private market values. This "wall of capital" creates sellers out of owner-operators who aren't sure the high private valuations are long-term. It's a great time to exit if you're not a long-term player or if you think the valuations private capital is giving to public portfolios are too compelling to pass up.

However, for managements trying to build and grow their companies long-term, the public markets are open and offer well-run private companies unparalleled access to capital. It's a phenomenal time to look at the public markets if you're a well-run private company.

Portfolio: Given these market conditions, what advice do you give real estate executives in their search for future capital?

Decker: With respect to IPOs, it's very simple: Don't overpromise and underperform. You need to deliver to investors what you told them you would do when you announced the IPO. The winning formula is to underpromise and overdeliver. Capital will flee from negative surprises. What investors seek is stable and predictable returns, and a well-managed real estate company can provide both.

Portfolio: Are the considerations different for follow-on offerings?

Decker: Successful follow-on offerings require a good use for the proceeds. REITs are penalized for stockpiling capital that is earning money market rates or worse, that isn't put to work and doesn't have a purpose. It becomes very dilutive to the current equity base to issue more shares and earn a low return on the proceeds. REIT management teams need to put the money to use quickly in a way that's accretive to shareholders.

In this market where cap rates are so low and property values so high, a traditional spread investment story is a hard sell—spread meaning the REIT's cost of capital is less than the return it can get on the investment of that capital. Those days are over, at least for now, and it would be hard to convince investors you could acquire real estate on a positive spread today.

Secondly, seasoned, mature REITs can execute overnight offerings because they are already well known, proven companies. But smaller, less-seasoned REITs would be wise to get on the road, meet investors face-to-face, and tell their story.

The traditional "road show" cannot be underestimated as an important tool in attracting investors, helping them to understand the story and participate in the growth of the REIT with the management.

Portfolio: You've said that you like to see companies "leave money on the table for investors" by lowering the IPO price because it always comes back to the company in a multiple. Can you explain this further?

Decker: The IPO is not the last capital event in the evolution of a private company going public—it is the first event in what will be a long series of finances and growth cycles. IPOs are priced by the market, which is bigger than any company or individual.

The market is incredibly receptive, and an issuer receives a nice premium valuation; however, sometimes it's very difficult and demands more from the issuer in the form of a lower price and valuation. Whatever valuation the market requires, and assuming it's within a reasonable range, the issuer would be wise to go forward and start the process of earning the public market's respect.

Any value initially 'left on the table' for investors will be recaptured as the REIT matures and proves its business model to investors. Getting into the game is what's critically important, more important than capturing every penny at the IPO.

Portfolio: You say that a company must strive for a balance between institutional and retail investors. What's the right balance and why does it matter?

Decker: I think the right balance long term is 60/40 or 70/30, institutional to retail. Retail tends to be a very stable investment base because investors buy-and-hold. They are not focused on daily or quarterly events. They just know the dividends and total returns are great.

The REIT was intended for individuals to participate in the larger-scale real estate opportunity not typically available to small investors, and I'd like to see that dream continue.

On the other hand, institutions are critically important for liquidity because retail investors tend not to actively trade. You need liquidity to get the stock price to the right place. However, if you had 100 percent institutional, you'd have more volatility.

Portfolio: You have called the Sarbanes-Oxley Compliance Act (SOX) a "major barrier" to small REIT IPOs. Reforms are being discussed. What do you think will happen?

Decker: The prospect for change is good. SEC Chairman Chris Cox is well aware of the overkill SOX has created and has started a critically important discussion, which I think will result in moderate relief. We don't need radical relief—let's be honest, a lot of SOX is good. But the burden on micro-cap and small cap REITs and other small public companies is unfair and unreasonable.

Portfolio: In addition to domestic activity, your firm is involved in cross-border merger and acquisition activity. What are the prospects for cross-border M&A among REITs?

Decker: There are some U.S. REITs partnering with local sharpshooters in Europe who know the local markets. There will be more of this in Europe and, increasingly in the future, in India and Asia. You still have tremendous opportunity here in the United States and investors generally want to see U.S. market opportunities realized before companies go overseas and take market and currency risk.

Christopher M. Wright is a regular contributor to Portfolio.