Private equity and real estate managers once again are acquiring real estate investment trusts and taking them private, a popular pre-crisis investment strategy.
The Blackstone Group LP has been the most active, taking four REITs private so far this year. But Blackstone is not the only firm with REIT acquisition fever. In March, real estate manager Brookfield Property Partners LP acquired the 66% of retail REIT GGP Inc. that Brookfield didn't already own in a deal worth $27.2 billion. Greystar Real Estate Partners LLC reportedly is in discussions to acquire Education Realty Trust Inc., a student-housing REIT.
Merger and acquisition activity appears to be headed for the pitch of 2007, the year Blackstone paid $39 billion to acquire Equity Office Properties Trust, the largest REIT privatization at the time. That deal accounted for the majority of the $87 billion in public-to-private REIT acquisitions in the U.S. that year, according to data from Nareit, the Washington-based trade group formerly known as the National Association of Real Estate Investment Trusts. In the first five months of this year, just two deals — Brookfield's GGP acquisition and Blackstone's purchase of Gramercy Property Trust Inc. in May for $7.6 billion — accounted for much of the $49 billion in U.S. REIT merger and acquisition activity. Total M&A activity so far this year far exceeds the $27 billion in all of 2017.
Driving this activity is the big difference between the public and private valuations of real estate, and that private equity and real estate managers have money to burn, industry insiders say.
While there are differences between now and 2007, in both years there was a "huge amount of capital on the private side," said Brad Case, Washington-based senior vice president, research and industry information at Nareit.
"Now REITs are undervalued. It's a great time to buy a REIT, but it can be difficult because REITs don't want to sell at a discount," Mr. Case said.
In 2007, REITs were overvalued, he noted. "Blackstone paid an enormous premium to buy EOP," Mr. Case said.
"A privatization offer is likely to be accepted if it represents a premium to an already-high valuation," Mr. Case said. "If, on the other hand, an offer is a premium to a depressed valuation but a discount to a correct valuation then it's not likely to be accepted."
It's not just money managers that are in the market to acquire REITs and other real estate operators; institutional investors also are buyers.