Merger And Acquisition Fever In CRE

Investors who own commercial real-estate stocks are getting mergers-and-acquisitions fever as some of the nation’s largest property landlords pay big bucks to take over rivals.

In the wake of Ventas Inc.’s $5.8 billion announced acquisition of Nationwide Health Properties this month and AMB Property‘s merger agreement with industrial landlord ProLogis in February, valued at $14 billion, portfolio managers are on the hunt for the next takeover candidates.

As such, they are picking real-estate investment trusts that are trading at discounts to their net asset values, that are relatively small in market capitalization or that operate in sectors believed to be ripe for consolidation.

While most analysts and investors assumed there would be a pickup in acquisition activity this year following the drought during the commercial real-estate crisis of the past two years, the sheer size of the Ventas and AMB Property deals signaled landlords will be more aggressive than expected when scouting deals.

One reason for the expected flurry of activity is the ability of commercial landlords to borrow at historically low interest rates to finance acquisitions amid rising property values.

“We think more transactions are in the cards in 2011,” says Jay Leupp, a REIT portfolio manager at Grubb & Ellis based in San Francisco. “Part of [our] investment thesis is acquisition candidates,” Mr. Leupp said, adding that industrial and health care are sectors likely to see the most consolidation.

Mr. Leupp said he likes First Industrial Realty, a Chicago-based industrial landlord that got caught flat-footed during the industry downturn because it took on too much debt to expand.

“We own shares in First Industrial because we believe it will be an ideal acquisition candidate either for a large industrial REIT or large private institutional investor,” he said adding the company’s portfolio trades at a 20% to 25% discount to its net asset value.

He also noted that First Industrial has been selling off assets to cut its debt and improve its balance sheet. Mr. Leupp also likes Cogdell Spencer Inc., a health-care landlord based in Charlotte, N.C. He cites the fact the company trades between a 15% to 20% discount to its net asset value and a “robust pace of consolidation in the … health-care space that will continue.”

Indeed, health-care companies have had an especially ravenous appetite for acquisitions. Last year, such companies acquired $11.7 billion in medical-office and senior-living facilities, according to CoStar Group, a commercial-real-estate research firm.

Daniel Cooney, an analyst at Keefe, Bruyette & Woods, said acquisitions among health-care companies are becoming more common because the operators realize their businesses overlap, which opens opportunities for cost cutting.

Many of these companies, he said, “have focused on the same five business segments.” He added that health-care REITs that are well-capitalized like Ventas are in a good position to make additional acquisitions.

Analysts said that investors are keen on Nashville-based Health Care Realty because its focus is almost solely on medical office buildings, and that would make it an attractive purchase for a larger landlord that wants to diversify.

The number and volume of deals is unlikely to reach levels seen during the height of the market in 2006 and 2007, when $106 billion and $68 billion of deals were completed, respectively, according to data provided by SNL Financial.

“We don’t expect M&A to reach 2007 levels this year, but we do expect to see significantly more activity than in recent years,” said Jeff Horowitz, head of Americas real-estate investment banking at Bank of America Merrill Lynch.


Mr. Horowitz said M&A activity will include public companies buying large private companies, public companies combining with other public companies, and an acceleration of single-asset acquisitions.

He notes that this will lead to a significant increase in the percentage of real estate held by public entities.

Still, the Ventas and AMB Property deals alone totaled $24 billion, including the assumption of debt and preferred securities. A few more deals will easily catapult 2011 to the third-largest year for mergers and acquisitions since 2000.

Increased merger activity comes as investors have poured into real-estate stocks because of the relatively high dividend yields, allowing REITs to outperform broader equity markets in 2009 and 2010.

Investors have been anxious for landlords to make mass purchases of distressed office, retail and hotel buildings after most REITs raised large amounts of equity in the last couple of years to expand and pay off debt. But those opportunities have been few and far between because many banks have been holding on to buildings that fell into default during the downturn on hopes values will continue to rise.

The lackluster market for initial stock offerings has also narrowed opportunities for investors.

“The REIT investors have been very frustrated by the inability of Wall Street to bring IPOs. To quench investors’ thirst … acquisitions is [a] response for existing REIT management,” teams, said Warren Dahlstrom, president of Investment Services at Colliers International in the U.S.

He expects most of the acquisition activity to pick up during the second half of the year. Mr. Dahlstrom also noted the two megadeals in the first quarter have likely created some peer pressure for other companies to follow suit.

“Companies may feel they would be at a competitive disadvantage if they don’t make acquisitions. Especially [those who are under] pressure to expand globally,” he added. (credit a.d. pruitt,wsj)


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