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Massive REIT Stock Offerings May Signal Future Deals

A recent spate of stock offerings by some of the retail sector’s stronger REITs points to a possible pick-up in acquisitions going forward, analysts say. Since March 19, more than a quarter of the sector’s 17 REITs conducted stock offerings. Most of those proceeds, which together with debt offerings might exceed $2.6 billion in total, will go towards paying down outstanding balances on revolving lines of credit. But that doesn't explain all the cash REITs have raised. Some have said funds may be used for "general corporate purposes"—REIT-speak for possible acquisitions, joint venture funding, developments, redevelopments and debt payments.

Firms with strong enough balance sheets might even use some of the equity being raised for either direct property buys or debt purchases, says Michael Magerman, senior vice president for the REIT sector with Realpoint LLC, a Horsham, Pa.-based credit rating agency. However, even if acquisitions pick up, under current market conditions these transactions will likely remain small and won’t include acquisitions of whole companies.

"I think one of the reasons so many REITs have [done stock offerings] recently is they realized there is a premium to be placed on shoring up their balance sheets and having more capital flexibility," says Todd Lukasik, a REIT analyst with Morningstar. "Some of them may use their improved balance sheets to look at acquisitions. We would expect there to be some bargains available for retail properties given what’s going on in that market."

Simon Property Group (NYSE: SPG), an Indianapolis-based REIT with the largest retail portfolio in the country at 246 million square feet, was the first to announce a stock offering on March 19, concurrent with a debt offering. By March 25, the firm closed on the sale of 17.25 million common shares, priced at $31.50 per share, and $650 million of its 10.35 percent senior unsecured notes, for a total of approximately $1.2 billion. Speaking at New York University’s annual REIT symposium on Apr. 2, Steven Roth, chairman and CEO of Vornado Realty Trust (NYSE: VNO), a New York City-based diversified REIT which has also commenced a stock offering recently, said the stronger players in the REIT sector would soon start raising equity in order to buy quality assets (Read story here)

Since then, five additional retail REITs have announced stock offerings, including Kimco Realty Corp. (NYSE: KIM), Regency Centers Corp. (NYSE: REG), Weingarten Realty Investors (NYSE: WRI), Acadia Realty Trust (NYSE: AKR) and Equity One, Inc. (NYSE: EQY). The trend was further spurred by a price recovery in the REIT sector—in the past month, REIT shares have risen by 30 percent to 60 percent, according to Morningstar. In March, the NAREIT Equity REIT Index registered a 3.05 percent increase in REIT prices after a 21.28 percent drop in February. Fearing the rally might not last, REIT executives might feel they have a short window of opportunity to improve their balance sheets, says Rich Moore, an analyst with RBC Capital Markets.

"There is real fear about this credit environment," Moore notes. "I think it tells you how bad things are when you have so many REITs making the same play. When they all do it, something’s not right."

Nevertheless, most analysts agree some of the money might be deployed toward acquisitions of choice assets, given that in April prices on commercial properties were down 17 percent year-over-year, according to Real Capital Analytics, a New York City-based research firm. Retail prices were down more than 25 percent from 2007 peaks. Many observers predict that the peak-to-trough drop-off in retail property prices will total approximately 45 percent.

Equity One, Inc., a North Miami Beach, Fla.-based REIT that announced an offering of 6.5 million common shares on Apr. 8, emerged as the most likely to target acquisitions. In addition to the common stock offering, which is expected to net $89 million, the REIT agreed to sell 2.45 million stock shares to MGN America, LLC, a firm affiliated with its largest stockholder Gazit-Globe Ltd., for a net of $35 million. Since Equity One already boasts a strong balance sheet and recently expressed interest in Ramco-Gershenson Properties Trust (NYSE: RPT), a Farmington Hills, Mich.-based REIT with a 20-million-square-foot portfolio, analysts think it might be getting ready to strike. (Read story here.)

"They could make a move," says Moore.

Simon also remains high on the top of REITs that might be looking at acquisitions. While analysts say it’s unlikely Simon would want to deal with General Growth Properties’ debt load (Read story here.), there are probably some assets in the latter’s portfolio that Simon would find attractive if the price was low enough, says Lukasik.

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