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A REIT consolidation wave? Numbers tell a different story

A publicly traded real estate company's every move today is recorded much like a baseball scorekeeper keeps track of hits, walks, runs and errors in a game. Compiled over time, such statistics make for interesting REIT trivia.

Did you know that in 1971 there were 34 REITs (equity, mortgage and hybrid) compared with 203 REITs by the end of 1999, according to NAREIT? Or that during the IPO boom years of 1993 and 1994, the number of REITs grew exponentially, jumping from 142 in 1992 to 189 in 1993, and to 226 in 1994? In short, the number of REITs increased 59% during that two-year period.

Statistics show that since 1996, the number of REITs has held fairly constant. As of July 2000, there were 197 REITs compared with 199 in 1996, according to NAREIT.

So what's my point?

Much has been written about how the REIT sector will eventually evolve into a handful of dominant players in each property type, that a wave of consolidation is imminent if not already under way. Perhaps such a trend will emerge, but to date the numbers don't support that conclusion.

If anything, the pace of mergers and acquisitions has slowed over the past two years in the REIT sector. In 1998, there were 17 mergers and acquisitions among REITs, according to NAREIT. In 1999, the number of M&As dropped to eight; through August of 2000, three such transactions have been completed, with a fourth one pending. This month's cover story by Mike Fickes looks at M&A activity throughout the commercial real estate industry.

"I do think consolidation will continue, although I am not one of the analysts who's convinced there will be eight or 10 REITs in five years," says Jay Leupp, managing director and senior equity analyst at San Francisco-based Robertson Stephens, an investment bank. "Given the nature of real estate, there will always be a large number of REITs, but I think the bulk of the liquidity in the sector will be concentrated in 10 to 15 stocks, and that's definitely happening."

Over the past three months a discrepancy has developed between the multiples (stock price relative to the funds from operations per share) of REITs, explains Leupp.

"Well-run REITs with a large market cap are starting to trade at 15% to 25% multiple premiums [compared with] companies with a smaller market cap that have less liquidity," according to Leupp.

"Earnings multiple discrepancies create consolidation opportunities," concludes Leupp. "That is the ideal ripe environment for consolidation to continue."

- New York-based Cornerstone Properties Inc. merged into Chicago-based Equity Office Properties Trust.

- West Palm Beach, Fla.-based CV REIT merged into Conshohocken, Pa.-based Kranzco Realty Trust to form Kramont Realty Trust.

- Denver-based Commercial Assets Inc. merged into Denver-based Asset Investors Corp.

- Dallas-based Prentiss Properties Trust to merge into Cranford, N.J.-based Mack-Cali Realty Corp. superscript *

(superscript *subject to shareholder approval) Source: NAREIT

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