Property Fundamentals, Credit Metrics May Be at an Inflection Point for REITs in 2014
Cashing in while the getting is good, REITs capped off a busy year in the final couple of days of 2013 wrapping up mergers, portfolio acquisitions and big deals totaling more than $4.3 billion.
The biggest year-end deal to close was American Realty Capital Properties' $3.1 billion acquisition of sister REIT, American Realty Capital Trust IV Inc., as part of its strategy to build the largest publicly-traded net lease REIT.
According to Fitch Ratings, 2013 was an opportune time to bulk up through mergers and acquisitions. However, buying their way to the top may not come as easy for REITs in 2014, the ratings agency reported.
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REITs have deleveraged and strengthened their respective credit profiles over the past three years, but positive ratings momentum may decline, Fitch noted this week. Deleveraging initiatives that REITs have taken in that time are largely complete and credit metrics may soon reach an inflection point.
Following the Great Recession, REIT management teams made a concerted effort to deleverage, improve the quality of their portfolios by pruning away unprofitable or non-core properties and markets, and reducing risk in their business models. These efforts have been buttressed by improving property fundamentals as evidenced by rising occupancies, rental rates, and net operating income.
However, rising interest rates, higher property values and growing development pipelines for REITs qualify the outlook for the REIT sector, the rating agency said.
Here is a quick summary of the major deals REITs completed as the Old Year wound down and the New Year began.
American Realty Capital Properties
The aforementioned American Realty Capital Properties completed its acquisition of American Realty Capital Trust IV for $3.1 billion. The deal creates the largest publicly traded net lease REIT and 14th largest REIT overall.
As a result of this and other recent acquisitions, ARCP will own 2,579 single-tenant properties net leased to 470 tenants across 29 industries in 48 states. ARCP's projected pro forma enterprise value will be approximately $10 billion, with annualized rent of more than $527 million, of which 57% will be from investment grade tenants.
ARCP also completed its transition to self-management this week following the merger.
Griffin-American Healthcare REIT II
American Healthcare Investors and Griffin Capital Corp. the co-sponsors of Griffin-American Healthcare REIT II Inc., completed multiple acquisitions totaling approximately $541.3 million during 2013. In total, the REIT completed approximately $1.5 billion in acquisitions during the year, and now owns a diverse portfolio of health care real estate valued at approximately $2.8 billion
Griffin-American Healthcare REIT II’s most recent acquisitions include the following:
· Four medical office buildings in and around Indianapolis totaling 57,000 square feet;
· Two multi-tenant medical office buildings totaling 52,000 square feet located in Marietta, GA;
· A portfolio of 14 medical office buildings from Duke Realty Corp. totaling 700,000 square feet located in Indiana, Michigan, Ohio and Texas.
· A portfolio of four rental continuing care retirement communities in three major urban metropolitan areas in Colorado, Illinois and Ohio, totaling 785 independent living units, 242 assisted living units, 45 memory care units and 137 skilled nursing units; and
· A three-story, 72,000-square-foot medical office building
in Middletown, NY.
Brandywine Realty Trust
Brandywine Realty Trust bought out its remaining common ownership interest of One and Two Commerce Square in 'Center City' Philadelphia for $248.87 million, or about $175 per square foot. Parkway Properties sold its 75% interest in the asset in a deal that values the properties at $331.8 million, following its $1.2 billion merger with Thomas Properties completed in December.
Forest City Enterprises Inc. closed a joint venture on its Charleston Town Center, an 892,000-square-foot regional mall in Charleston, WV, with QIC, one of the largest institutional investment managers in Australia. The deal was the final closing between the two companies for a portfolio of eight of Forest City's regional retail malls. Under the latest deal, Forest City contributed its current 50% ownership interest in in exchange for a 51% interest in the joint venture, and QIC acquired a 49% interest. The eight-mall transaction values the overall portfolio at $2 billion, and generated total liquidity for Forest City of approximately $350 million.
Federal Realty Investment Trust
Federal Realty Investment Trust acquired controlling interest in two shopping centers totaling 285,600 square feet in affluent Monmouth County, NJ, for a total value of $161 million. The Grove at Shrewsbury and Brook 35 are located on busy Route 35, less than three miles from the Garden State Parkway, serving the NY Metro emerging bedroom and second home communities of Shrewsbury, Red Bank, Rumson, Fair Haven, Little Silver and Middletown.
Gramercy Property Trust
Gramercy Property Trust Inc. closed on three new industrial property acquisitions in two separate sale-leaseback transactions totaling $51.6 million. Two of the buildings are located in Vernon, CA, in Los Angeles and the third building is in Allentown, PA.
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