The big buzz during the NAREIT conference this week has been the proposed $8.9 billion buyout of Trizec Corp. by The Blackstone Group and Brookfield Property Corp. According to speakers at a NAREIT panel on Tuesday, the REIT sector can expect more such deals and in all property types.
To date, 17 entity-level transactions have been announced or completed in 2006, worth a combined $35.6 billion—about three-quarters of which have been privatizations. In all of 2005, there were $50 billion in entity-level transactions, about two-thirds of that coming as private buyouts. (Blackstone alone has participated in seven REIT buyouts.)
Part of what’s driving the trend is that the huge payouts to shareholders. Paul Ingrassia, managing director for Citigroup Global Markets Inc., estimates of the $85 billion in REIT deals closed in 2005 and 2006, returning $30 billion in cash to shareholders. This, in part, has flowed back into the REIT sector as firms have raised $20 billion through new issues of stocks and bonds.
“The capital has to find a home and it is pushing REIT multiples up or keeping them at already high levels,” Ingrassia said.
Ingrassia says more deals will come because there is so much money being raised by real estate opportunity funds and pension funds, which are on pace to raise $130 billion in 2006—up from $90 billion in 2005 and $64 billion in 2004. “For some perspective, the entire enterprise value of the REIT universe is about $500 billion, meaning that if these funds leverage up to 80 percent, the entire REIT sector could be bought in 10 months,” Ingrassia said.
At the same time, hedge funds—sitting on about $1.3 trillion in equity (up from $400 billion in 2000, according to Ingrassia)--are helping keep real estate hot and helping keep cap rates down. Though they are only on the margin of the real estate deals, “they are active as hostile participants in REIT offerings and M&A transactions,” Ingrassia said. Hedge funds have also been active in buying CMBS issuances, absorbing risk from mortgage REITs and other lenders.
Thanks to the growing role of pension fund investing in REITs, said Stephen Furnary, Chairman & CEO, ING Clarion Partners, there is little danger that publicly traded REITs will disappear.
“The biggest secular trend we’re dealing with is one that started in the mid 1990s and that is defined benefit and defined contribution plans looking at real estate,” he said “That isn’t changing and REITs are still the best way to get money into real estate. … We’ll live through the ups and downs. We’ll all make money and the REIT market is not going away.”
-- David Bodamer