The Next Wave of REIT Privatization
- May 20, 2015
Recently announced acquisitions of Excel Trust and Associated Estates may be harbingers of the next wave of U.S. REITs going private in a decade.
The last meaningful period of REIT privatizations occurred between 2005 and 2007, when 30 REITs were acquired representing $123 billion of enterprise value. Current market conditions are setting the stage for another round of acquisitions, potentially of a similar magnitude. If the last wave is any barometer, REIT public-to-private transactions could number 30 to 40 in the next few years.
A pre-eminent catalyst for this potential privatization wave is debt and equity capital, both of which are in ample supply, low-cost and less-discerning and looking similar to that preceding the last wave. Since REITs do not need to trade as wide of a discount or have as much growth for returns to pencil out in a low yield world, the number of candidates increases; more capital and more targets should mean more transactions. New players are also joining private equity capital as potential REIT buyers, among them sovereign wealth funds and other long-term equity sources like Chinese insurance companies that could look to REITs as operating platforms for their rapidly expanding U.S. real estate portfolios.
Moreover, REITs may be more willing to entertain offers this time around given the sustained rally in fundamentals, share prices approaching all-time highs and above-average multiples. That is, the longer the rally to-date, the less growth being “left on the table”. Whether a transaction occurs will come down to the specific facts and circumstances of the company in question. In general, office retail and industrial are three sectors where, on average, companies are trading below consensus NAV.
As to what this means for REIT bondholders, Fitch sees a mixed bag. REIT bondholder implications can include bond tenders, consent payments, and in the most extreme instance, credit downgrades. That said, REIT bonds enjoy some key structural attributes due to covenants in bond indentures. To achieve targeted returns via the use of leverage, private equity firms have little choice other than to negotiate with bondholders to tender for the bonds. These provisions have shielded many REIT bondholders from the fate of fixed-income investors in other corporate sectors