Flush with cash, real estate managers are buying up real estate investment trusts to take advantage of the gap between public and private valuations — a sign the commercial real estate market is in the last stages of its cycle, managers said.
REIT share prices have suffered this year, trading roughly 15% below net asset value after trading at a premium last year.
Privatizations give REIT portfolios and equity portfolios with REIT exposure a boost in returns and offer properties at cheaper prices, industry insiders say. But privatizations also offer evidence that while the top of the market might not be around the corner, it's definitely in the neighborhood.
“There's no question that privatizations tend to happen later in cycles,” said Cedrik Lachance, managing director at Green Street Advisors LLC, a real estate research and advisory firm in Newport Beach, Calif. “There was a significant wave (of privatizations) from 2005 to 2007 and since then it's been largely quiet.”
The quiet ended this year. Three REIT privatizations have occurred so far in 2015, two of them in the multifamily housing business.
In June, Home Properties Inc. announced it was being acquired by real estate firm Lone Star Funds in a $7.6 billion deal. In April, Associated Estates Realty Corp. announced its sale to real asset manager Brookfield Asset Management Inc. for $2.5 billion. Also in April, Excel Trust Inc., a REIT specializing in commercial strip centers, announced it was being purchased by Blackstone Group for about $2 billion.
REITs hold a treasure trove of properties, owning roughly $1.7 trillion of commercial real estate assets as of June 30, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group.
Real estate managers have cash to burn. Managers of real estate equity held a record total of $249 billion in unspent capital commitments as of June 30, which has not been easy to invest in light of increased competition and rising property prices. So managers are taking advantage of the drop in REIT share prices to scoop up underlying portfolios at lower prices than buying the properties individually.
“There's no question today that there is a wall of capital — domestic and global — that wants to own U.S. real estate assets, and so if they (real estate managers) see the opportunity to buy a REIT at a price below where they would be purchasing similar assets in the private market, the likely result is more REIT privatizations,” said J. Scott Craig, vice president and portfolio manager with Eaton Vance Management in Boston.
REIT privatizations slowed down considerably after 2007, when 14 REITs worth a total of $122.5 billion were taken private, according to data from NAREIT. The largest transaction — Blackstone Group's $39 billion takeover of Sam Zell's Equity Office Properties Trust in 2007 — ended up marking the top of the last commercial real estate cycle. Despite the high price Blackstone paid, the firm recently indicated it expects to triple its money from the investment.
Only two REIT privatizations occurred in 2014, valued at a combined $1.1 billion, and only one was done by a real estate manager. GoldenTree Asset Management LP acquired Origen Financial Inc., a REIT that invests in manufactured housing, in September for $456 million.