The number of REITs is contracting, which could be good news for institutional investors, industry insiders say.
About 150 real estate investment trusts are traded on the New York Stock Exchange, with a listed market capitalization of $264 billion, according to the National Association of Real Estate Investment Trusts. Washington.
This year, the rate of REITs either merging or going private has increased. Some examples include the mergers of Camden Property Trust and Summit Properties Inc.; General Growth Properties Inc. and Rouse Co.; Cerebus Capital Management and LNR Property; Blackstone Group and Extended Stay America Inc. and Blackstone Group and Prime Hospitality Corp.; Hometown America LLC and Chateau Communities Inc.; Ventas Inc and Elder Trust; Asian Realty Partners LLC and Great Lakes REIT; and Prologis and Keystone Property Trust. In the case of the two Blackstone and the Cerebus deals, the REITs also were taken private.
"It's partly the function of the pain of being a public company and partly the reduced coverage by Wall Street," said Dale Anne Reiss, global director of real estate at Ernst & Young LP, New York. With Wall Street analysts curtailing their activities, smaller REITs are not getting the coverage and therefore, are not as attractive to institutional investors, she said.
It's tough being a small public REIT, said Richard J. Campo, chairman and chief executive officer of Camden Property Trust, which bought Summit in a $1.9 billion deal on Oct. 4. Mr. Campo considers the combined Camden Properties, with $3.9 billion in assets as a small, large-cap REIT. It's hard operating a small REIT with anything less than $3 billion, he said.
In order to defray costs of the merger, Camden expects to form a joint venture with an institutional investor to buy multifamily properties with an estimated value of $450 million to $500 million, Mr. Campo said. Camden will retain a minority interest in the joint venture and expects to provide property management. The joint venture should be in place in 2005.
Joint ventures are becoming more common, said Michael Grupe, senior vice president for research of NAREIT.
"In a public company you have to be big. It takes a large infrastructure and the cost of capital is a lot higher," Mr. Campo said. "What is driving mergers today is the efficiencies and the economies of scale. The scale now is $4 (billion) to $5 billion."
Still, consolidation is not a bad turn for institutional investors, Ernst & Young's Ms. Reiss said.
"Fewer bigger REITs, that's an OK fact pattern. Bigger REITs means more liquidity and less underrated data," Ms. Reiss said. "There's nothing wrong with that."