Public Enemies: REITs Continue To Embrace Private Model

Another real estate investment trust (REIT) is going private. The latest defector: West Coast-based Bedford Property Investors (BED), which owns 7 million sq. ft. of office parks around the San Francisco region. Assuming the $421 million privatization is closed next quarter, Bedford will become the second West Coast office REIT to go private within the past three months (Arden Realty Trust, another California-based office REIT, was bought by GE last December for $3.2 billion). [see previous story at]

What makes this deal interesting is that Bedford, much like Arden (ARI), hasn’t posted stellar performance during the past 12 months. Yet on Monday, Irvine, Calif.-based LBA Realty LLC still agreed to shell out $27 for each common share, plus a 21 cent per share kicker for Bedford’s common stock dividend through the end of March. LBA Realty, a private institutional property manager, owns more than 12 million square feet of office and industrial properties scattered throughout the western U.S.

The $27 per share purchase price represents a 17.6% premium over Bedford’s $22.95 average closing price for the 30 days that ended Feb. 9, reports Charlottesville, Va.-based SNL Financial. BED shares had traded relatively flat during the 12 months leading up to Tuesday, ranging from $20.69 to $26.92. Bedford’s funds from operations (FFO-a measure of REIT profitability) fell 32% in 2005. But news of the acquisition pushed shares up by $2.31, or 9.4%, by the end of the day yesterday. Bedford owns a 7 million sq. ft. portfolio comprised of 33% office, 32% R& D, 24% service center flex and 11% bulk warehouse properties.

“Bedford Property Investors has continuously evaluated ways to maximize stockholder value,” says Bedford chairman and CEO Peter Bedford. “We believe it is an appropriate time for the company undertake a transaction such as this, which will bring a substantial cash payment to our stockholders.”

The REIT put itself up for sale two years ago, but failed to find a suitor. That triggered what Lehman Brothers analyst David Harris calls a “slow motion liquidation” strategy whereby Bedford sold off individual assets between 2003 and the end of last year. Property fundamentals in the Bay Area haven’t helped matters: Manhattan-based real estate research firm Reis reports that office vacancy in the San Francisco region, while declining, stood at 15.6% at the end of 2005. The U.S average was only 14.7% back then while average office vacancy for the western U.S was even lower at 13.3%.

In a Feb. 14 research note, RBC Capital Markets analyst David Ronco described the sale price as “attractive,” given significant leasing turnover in the Bedford portfolio. Roughly 31% of all Bedford’s leases will expire by the end of next year. That huge turnover will put added pressure on Bedford to renew existing leases or sign new tenants at higher rates. Portfolio occupancy was hovering around 91% at the end of 2005. Ronco also predicts that rental rates and net operating income (NOI) declines could be likely in coming quarters.

Bedford shares, which had traded in the 30s in late 2004, plunged to the low 20s last year. If the deal goes through, Bedford will become the tenth public REIT to go private since 2003, bringing the total dollar value of privatized REIT deals up to roughly $21 billion over the period, according to SNL Financial. Prior to 2003, just one public REIT had gone private.

Why the upswing? Private buyers, apparently are now willing to place a higher value on REIT operations than public investors: Private buyers paid a 20% premium on average to gobble up public REITs, according to SNL Financial. Another factor is the rising costs of operating as a private company. According to the National Association of Real Estate Investment Trusts (NAREIT), costs associated with Sarbanes-Oxley (SOX) and other regulatory controls can range from $150,000 to $500,000 for smaller companies.

“Private capital is finding more acquisition opportunity in the public market,” writes analyst Ronco. “With long-term interest rates projected to remain in their current range, we expect mergers & acquisitions (M & A) activity to continue.”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.