Even as Broader IPO Market Activity Rises Dramatically, REIT Stock Selloff Stymies Those Hoping to Merge or Tap Public Equity Markets
|Cole REIT founder Chris Cole and CEO Marc Nemer rang the opening bell at the New York Stock Exchange on June 21, 2013, to celebrate their recent listing.|
Call it the Great REIT Roll-up of 2013. This year’s crop of REIT mergers, initial public offerings and conversions includes a number of large deals in which companies have rolled up funds and non-traded REITs into publicly traded or non-traded entities -- in many cases to create liquidity events for long-time shareholders.
Earlier in the recovery, especially during 2010-2011, new REIT market entrant launches included many so-called "blind-pool" entities that sought to raise capital from investors based on the track records of their executive management teams, many of whom were former REIT managers. But the fact that those proposed REITs did not yet actually own any assets deterred investors, and some of those blind-pools were postponed or scrapped.
By contrast, the large private-equity players and veteran REIT managers backing the recent wave of REIT formations, mergers and conversions own plenty of property, it's just that it's held in smaller portfolios and non-traded entities that are getting rolled up into some of the largest REIT transactions of recent years. Investors in the triple-net/single-tenant lease, health-care real estate, and other specialized property types have been especially active.
"The majority of the IPOs this year have been roll-ups of some type of portfolio into a new entity," noted Stuart Eisenberg, real estate practice leader for accounting and consulting company BDO USA, LLP. "The consensus is that investors would like to have a portfolio they’re investing in, as opposed to just giving a management team the go-ahead to start a fund and go buy property."
Eisenberg expects strong activity on this front for the rest of 2013, with existing REITs raising equity as needed from the public markets, and investors continuing to put additional IPO deals in the pipeline.
"The question is whether the pricing and the volume of proceeds in these offerings will be acceptable to some of those who are anticipating going public," he said. "Also, the upward movement of interest rates and international volatility is having a bit of an effect on the markets."
Typically, a REIT roll-up is formed when pre-existing operating entities or properties are combined into a single operation under a new public company through a merger or IPO. The process can vary significantly among transactions and are generally driven by tax or marketing strategies.
Some of the world's largest private-equity companies and REITs have gone this route to buy property, or to unload assets they acquired during the previous real estate cycle.
One major transaction involves W.P. Carey Inc., a traded REIT, which recently announced it will acquire one of its non-traded REITs, Corporate Property Associates (CPA) 16, in a transaction valued at close to $4 billion. The combined company is expected to have an equity market capitalization of about $6.5 billion and an enterprise value of $10.1 billion following the merger, which is subject to the approval of stockholders from both REITs.
In July, private equity firm Blackstone Group filed to take its fifth firm public this year via an IPO, the Extended Stay America hotel chain. The proposed offering consists of common stock of Extended Stay America and Class B common stock of ESH Hospitality Inc., which will trade together as a unit.
Blackstone has also been planning two big-ticket IPOs: Brixmor Property Group, their shopping center investment company; and Hilton Worldwide. Analysts have also mentioned Blackstone’s La Quinta hotel portfolio as a potential candidate for a public offering.
Blackstone has a strong track record of forming new REITs culled from its various real estate investments. Blackstone launched BRE Select Hotels Corp. this past spring, after BRE Select acquired Richmond, VA-based Apple REIT Six Inc., and its portfolio consists of 66 hotels with 7,658 guestrooms in 18 states, for $1.2 billion.
Blackstone Mortgage Trust Inc. also completed a public offering of 16 million shares raising more than $500 million to originate CRE loans. WCI Communities, a lifestyle community developer and homebuilder of single-and multifamily homes in Florida's coastal markets, launched a public offering in July. WCI, which owns or controls 8,300 home sites, is chaired by Stephen D. Plavin, senior managing director of the Blackstone Group and the CEO of New York-based Capital Trust, a mortgage REIT now managed by Blackstone.
The uptick in rollup activity is also a function of the dramatic acceleration in liquidity events for investors in the non-listed REIT industry, said Kevin Hogan, president and CEO of the Investment Program Association, an Ellicott City, Md.-based trade group representing 50 direct investment vehicles, including non-listed REITs and business development companies (BDCs).
While the financial criteria driving these decisions to roll up and go public vary by company and asset type, the firms "obviously feel that real estate fundamentals are sound, occupancy rates and rental rates are very stable, so the parent companies are willing to provide the liquidity to go public," Hogan said.
"The non-listed industry is becoming more competitive and creative, and we’re seeing new approaches. These rollups are examples of new ways the industry is offering value to the investor," he said.
Other public offerings involving rollup or merger transactions include:
- American Realty Capital Properties (NYSE: ARCP) in February rolled up American Realty Capital Trust III (ARCT3), acquiring the latter's 16.5 million-square-foot net lease portfolio. In July, the company announced yet another related non-traded REIT merger, a $3.1 billion deal giving American Realty Capital Trust IV (ARCT4) shareholders 2.05 share of ARCP common stock.
- Apple REITs 7, 8 and 9 agreed last month to roll into a single hospitality investment trust through two merger transactions. Apple 9, the resulting REIT, will have a portfolio comprised of 191 hotels with 23,711 rooms in 33 states, subject to shareholders approval.
"Due to the increased size and scale of the combined company, we believe that it will be better positioned to pursue enhanced avenues of liquidity for our shareholders through the exploration of certain strategic alternatives such as possibly listing the combined company on an exchange, a sale of the combined company or a merger with a third party company and to have access to more attractive financing," said Glade M. Knight, chairman and chief executive of Apple REITs 6 through 9. McGuireWoods LLP is acting as corporate counsel to each Company in connection with this transaction.
- Phoenix-based Cole REIT Inc. (NYSE: COLE), a non-traded REIT sponsor which primarily invests in triple-net retail, office, and industrial properties, this spring rolled up Cole Credit Property Trust III, raising $809 million to funnel back to investors in the form of liquidity events.
Cole REIT, closed at $11.11 on Sept. 3, nearly even with its June 10 launch price of $10.90.
- A host of REITs hoping to take advantage of the recovery in the single-family home market have turned in mediocre-to-subpar performance in publicly traded markets since their IPOs, including American Residential Properties Inc. (NYSE: ARPI), Ellington Residential Mortgage REIT (NYSE: EARN), and Trade Street Residential Inc. (Nasdaq: TSRE). All posted double-digit losses since their initial offerings.
On a related note, launches of initial public offerings (IPOs) hit a six-year high in the second quarter, with five publicly traded REITs among the 61 companies that raised a total of $13 billion, according to Renaissance Capital.
That would have been a fairly impressive showing even in 2007 during the heady moments before the Great Recession and the freezing of the credit markets piled heavy leverage onto many REITs.
But most of those REIT IPOs launched early in the second quarter of 2013, before worries about rising interest rates and most recently, concerns about war in Syria kicked off a period of market softening and a market sell-off that has cut into investment trust shares since May.
In total, the REIT world has seen almost 40 new companies listed since the Great Recession, through 29 IPOs, four listings of non-traded REITs, five conversions and one spin-off. Mergers have eliminated a number of companies, but the REIT space has still grown considerably, and the future pipeline continues to be large.
A growing number of private companies are in registration for public markets -- and a large amount of real estate in non-traded REITs will eventually need to be transferred in order to create liquidity events for their shareholders, according to a Citi analysis of IPO conditions for REITs.
While the downturn in REIT performance since May is likely playing a part in the timing and composition of offerings, "we expect a significant amount of the companies and portfolios will find their way into the public markets either as new listed entrants, or as acquisition opportunities for the existing REITs," Citi's Michael Bilerman noted in the recent analysis.