August Issue: M&As Rise & Shine

By Gail Kalinoski, Contributing Editor  Scottsdale Quarter, Scottsdale, Ariz.  The proposed merger of Cushman & Wakefield Inc. and DTZ garnered a lot of attention earlier this year because of its sheer size, a reported $2 billion transaction that will create the world’s third-largest commercial real estate services firm. But it is also emblematic
Mark Skalny Photography

Scottsdale Quarter, Scottsdale, Ariz. 

The proposed merger of Cushman & Wakefield Inc. and DTZ garnered a lot of attention earlier this year because of its sheer size, a reported $2 billion transaction that will create the world’s third-largest commercial real estate services firm.
But it is also emblematic of the consolidation and M&A activity swirling through the CRE industry. The consortium that acquired DTZ last year had quickly also snapped up Cassidy Turley, combining the entities. Meanwhile, Cushman & Wakefield had purchased New York City-based investment sales firm Massey Knakal Realty Services.

“I would suspect we may still see a little more consolidation in the service providers’ space. I don’t think we’re done,” said Jahn Brodwin, senior managing director of FTI Real Estate Solutions.

Indeed, DTZ and Cushman & Wakefield’s move was only one of numerous M&A deals made in the first half of 2015. And CRE experts predict that more are coming, driven by plentiful capital, activist investors and foreign investors looking for U.S. real estate transactions.

“This is a seller’s market. There is a wall of capital chasing real estate,” observed Mitch Germain, managing director at JMP Securities.
One of the larger sovereign wealth fund deals, announced in December and closed in early 2015, involved GIC, Singapore’s sovereign wealth fund, paying $8.1 billion to Blackstone for IndCor Properties, a U.S. industrial platform with 117 million square feet of high-quality properties. A week later, GIC said Global Logistics Properties Ltd., a leading provider of logistics facilities in Asia and Brazil, would be taking a 55 percent stake in IndCor.

In January, Green Street Advisors released a report by Mike Kirby and Peter Rothemund predicting that REIT M&A activity would pick up this year to a pace unseen since 2007. The report stated pressures were building for more public-to-public sales but also noted that conditions were ripe for privatizations.

“There has been a healthy pace of M&A and privatization activity so far this year, so one could say it has matched our expectations,” Cedrik Lachance, a managing director at Green Street Advisors, told CPE. “The gap between the value of real estate in the public market and the private market has widened with the recent share-price declines. That would suggest continued high odds of privatization activity.”

In May, Britton Costa and Steven Marks of Fitch Ratings also spotlighted the trend in a report, “U.S. Equity REITs: The Privatization Fuse is Lit.” In a column that month for CPE, Costa pointed to the acquisitions of Excel Trust and Associated Estates as “harbingers of the next wave of U.S. REITs going private.”

Excel Trust Inc., a retail REIT that owned 38 community shopping centers, agreed in April to acquisition by Blackstone Property Partners L.P. for $2 billion in an all-cash deal. That deal was announced soon after General Electric Co. said Blackstone Group and Wells Fargo & Co. were buying most of GE Capital Real Estate’s assets for some $23 billion.

Also in April, apartment REIT Associated Estates Realty Corp. announced its sale to Brookfield Asset Management for $2.5 billion in cash. The deal came several months after Associated Estates began pursuing opportunities to maximize shareholder value. It had also been a target of hedge fund manager Jonathan Litt of Land and Buildings, an activist investor who wanted to add three new members to its board. Litt, who had pushed for the company’s sale as far back as November, was pleased with the acquisition news.

The biggest private equity deal for a REIT so far this year has been Lone Star Funds’ plan to buy Home Properties, also a multi-family REIT, for about $7.6 billion, including assumption of debt. Home Properties would become private upon the deal’s close later this year.

Multi-Year Wave
Costa said in an interview that those three examples could show the REIT sector is at “the beginning of a multi-year wave of privatization.” He added that market conditions are similar to the last period of REIT privatizations, between 2005 and 2007, when 30 REITs representing $123 billion of value were acquired.

“Assuming a similar percentage of companies go private as last time, transactions could number 30 to 40 over a few years,” Costa and Marks wrote in their report.
“Capital formation via private equity fundraising, sovereign wealth funds increasing real estate allocations and a rebounding commercial mortgage-backed security market provides ample funding for privatizations,” the report continued.

There has also been public-to-public action on the REIT M&A front, including the planned merger of Chambers Street Properties and Gramercy Property Trust. The all-stock deal will create the largest industrial and office net- lease REIT, with an enterprise value of approximately $5.7 billion.

Germain called it a “merger of equals” and noted he wasn’t surprised Chambers Street was looking for a sale after former CEO Jack Cuneo announced his retirement last November. “When there was no chatter or progress on the hiring front, many people felt the company was likely a sale candidate,” Germain told CPE.
Early this year, other deals announced in late 2014 began to bear fruit. Washington Prime Group and Glimcher Realty Trust came together in a cash-and-stock deal worth $4.3 billion. Now known as WP Glimcher, the REIT owns and manages 121 shopping centers totaling more than 68 million square feet.

In June, it announced that it had completed a joint venture with O’Connor Mall Partners L.P., an affiliate of O’Connor Capital Partners, for a 49 percent interest in five properties, including Scottsdale Quarter in Scottsdale, Ariz., and Polaris Fashion Place in Columbus, Ohio. About $430 million from the JV was used to repay part of the bridge loan used to finance the Glimcher Realty Trust acquisition.

In the healthcare sector, Ventas Inc. continues to make moves. In April, it paid $1.7 billion for Ardent Health Services, one of the nation’s 10 largest for-profit hospital companies. Ventas is retaining the 10 properties acquired in that deal but agreed in early July to sell 90 percent of Ardent’s operations business to Equity Group Investments for $475 million.

Non-traded REITs are also in the mix. In January, Cole Corporate Income Trust, a non-listed office and industrial REIT sponsored by Cole Capital, was merged into an affiliate of Select Income REIT. The $3.1 billion deal was one of several successful liquidity events for Cole Capital. Germain said that new regulations facing non-traded REITs might lead to more such deals.