There was roughly the same number of M&A deals in the U.S. REIT sector so far this year compared to last year—but they sure are worth more overall, thanks to Brookfield Asset Management Inc.’s two big recent privatization plays.
REIT M&A activity has totaled $81.75 billion year-to-date as of Oct. 3, according to new data from S&P Global Market Intelligence. During the same period last year, deal volume totaled $33.37 billion.
However, the data showed that there have been 13 deals that either represent “definitive agreements” or have been completed between the start of the year and Oct. 3. Last year, there were 15 deals during the same period. There were 18 deals in all of 2017, totaling $35.61 billion, according to S&P. In 2016, there were 17 deals whose transaction value totaled $40.13 billion.
This uptick in total transaction value is part of the REIT cycle, says Daniel LeBey, a partner in the capital markets and M&A practice at law firm Vinson & Elkins LLP. It has been harder for REITs to raise money in the capital markets, causing REITs to seek other alternatives for liquidity and growth, such as M&As, he says. “In the last couple of years, the REIT IPO market has been challenging and REIT equity capital markets in general have been challenging, so it is not surprising that M&A activity picked up,” LeBey says.
There have been four equity REIT IPOs in 2016, 2017 and 2018, and similar figures in 2014 and 2015, according to industry group Nareit. In 2013, there were 13 equity REIT IPOs.
S&P’s analysis looked at real estate deals where the buyer or target is a U.S. equity REIT and was limited to deals where 100 percent of the total equity of the target company changed control. S&P calculated total deal value by taking whichever value was reported first: transaction value as reported; deal value including debt assumption; or unavailable deal value.
There were four deals where the as-reported transaction value was not available, so SNL calculated the deal value, including debt assumption.
Likely helping to skew the deal volume amount was Brookfield Asset Management’s privatization moves involving diversified REIT Forest City Realty Trust Inc. and mall REIT GGP Inc. Brookfield Property Partners, the real estate arm of Brookfield Asset Management, completed its acquisition of GGP for $27.15 billion—the costliest transaction so far this year which included debt assumption. Brookfield Asset Management has a definitive agreement in place to buy Forest City for $11.4 billion.
Even without these two deals, deal volume would be $43.2 billion—still above the year-to-date total deal value for 2017.
Private investment real estate managers still have a lot of capital committed to real estate that needs to be deployed, triggering a wave of privatization in the REIT space, says Brad Case, senior vice president of research and industry information at Nareit. Meanwhile, private real estate is overvalued. “REITs are undervalued, so it’s very appealing to buy a REIT,” he says. “You’re essentially getting the same real estate assets, but at a better price.”
Case says he wouldn’t be surprised if more aggressive privatization offers for public REITs start to come in, as private equity investors look to complete deals before the gap in valuations closes. “That window is likely to close at some time in the next couple of years,” he says.
According to S&P’s data, four diversified REIT deals made up the largest portion of total deal value year-to-date, with Brookfield’s Forest City buy coming out on top in the group.
Matt Kopsky, a REIT analyst at Edward Jones, says he expects shopping center REITs to see more M&A activity in the future. As the perception grows that retail is improving for high-quality retailers in good centers with strong demographics, “you could start to see larger buyers come into the space and try to make a value play and buy some of these shopping center REITs at discounts,” Kopsky says.
The question remains, though, whether these public REITs would be willing to sell at below net asset values. “There still remains that disconnect, but if these valuation disconnects continue for a longer period of time I think you would get some shareholder pressure to do that for one or two of these companies,” Kopsky says.