NEW YORK CITY-Despite a sluggish second-half, the nation’s biggest REITs had a strong 2011—and 2012 is looking even better. Panelists at the Practising Law Institute’s “REIT and Real Estate M&A and Restructurings” conference on Jan. 12 said mergers and acquisitions—both public and private—will be a big part of 2012’s total activity.
From large-scale public-to-public mergers in the industrial and healthcare sectors to major private-to-public acquisitions as private assets and companies continued to undergo ownership changes, PLI says overall deal volume hit the $70 million mark in 2011. The year marked a range of deals, including the ProLogis/AMB merger, Blackstone buying out Centro and Ventas acquiring Artia Properties.
However, Matthew Lustig, vice chairman of US investment banking and head of real estate at Lazard, said mergers and acquisitions will be “more active” from the previous year. "They [public companies in certain sectors] will continue because they have a dramatically lower cost of capital than the private companies, and there is less competition to buy private companies,” he said. Lustig said there is a growing dichotomy between large well-capitalized companies and smaller less-capitalized companies in the public market.
“It is a bit of an oligopolistic structure within the healthcare REIT, in terms of the cost capital to be able to advance their strategies and acquire both public and private companies, so I’d expect that to stay,” he said.
Lisa Eyles Beeson, head of real estate mergers & acquisitions at Barclays Capital, said the major acquisitions by REITs in 2011 utilized stock rather than cash as the acquisition currency. “Whenever you have a tremendous amount of volatility, frankly, it is hard to get a transaction done,” she said. “Using stock on a relative value basis does sometimes help raise the value back.”
This year, Beeson said bifurcation between small companies less than $1 billion and larger ones is affecting cost of capital. “It will boil down to whether they take stock in a larger company, or recognize that they are having access to capital challenges,” she added. “But you will see some chunky financial buyer cash transactions. My guess is that it will be a third or a quarter of the business.”
James M. Barkley, general counsel of retail REIT Simon Property Group, Inc., of Indianapolis, said “discipline” defined the company during the financial crisis by reducing leverage and conserving cash on its balance sheet. “Our combination of cash and stock was very important to us,” he said. “We thought there would be opportunities throughout the crisis that we could take advantage of.”
Barkley said that the REIT didn’t rely on its long-term credit facility and conserved $1 billion in dry powder. “So when opportunities did come along, we were able to take advantage of that very quickly,” he said. “Having multiple platforms in the retail industry helped us a lot. Even though the financial crisis hit every corner of the country, there were different aspects of the retail sector that were still doing reasonably well.”
On the leasing side, Barkley said retail went into the recession “better prepared” than others, but some tenants survived, while other bricks-and-mortars did not. “Those who could not, we were pretty quick to cut the cord,” he said.
Bruce Rubenstein, general counsel at Kimco Realty Corp. of New Hyde Park, NY, said prior to the financial crisis, the REIT had expanded its investments into some non-retail asset classes, including hotels, office and nursing homes. With respect to shopping centers, Kimco is now seeing in the marketplace a widening of the gap in terms of demand for the A quality assets, for which there is a lot of demand as compared to the B and C classes of assets.
“As part of our strategy, we are in the process of shedding our non-core assets and non-strategic retail assets, and focusing more on our core portfolio,” he said.
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