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REIT Tie-Ups In 2021 Set To Be Highest In Years

This year is on track to be the highest for real estate investment trust tie-ups for at least the last three years, a trend driven in part by factors such as high property prices and the return of large segments of the real estate market.

There have already been 28 mergers and acquisitions between REITS as of the end of the third quarter of 2021, surpassing the 24 and 17 transactions that occurred for all of 2020 and 2019, respectively, according to data from Dealogic.

The year is also on pace to beat out the 28 such deals in 2018, though it remains to be seen if the trend will continue as far as to surpass the 34 tie-ups reported in 2017.

Additionally, the total deal volume of $78 billion far outpaces the $20.6 billion and $33.2 billion in such deals the industry saw in 2020 and 2019, respectively, as well as the $67.6 billion in 2017.

Factors such as high stock prices and a relative dearth of activity at the height of the pandemic, coupled with some REITs finding it easier to engage in deals than rebuild their company from the economic consequences of the pandemic, have all helped contribute to the trend, experts said.

"For real estate companies, their mindset is, if you're standing still you're falling behind," said David Bonser, partner and global head of the REIT practice at Hogan Lovells.

While some segments of the real estate market such as office space have yet to fully recover, other assets like data centers and industrial warehouses thrived during the pandemic and are still generating interest from investors and prospective buyers.

Pointing to Blackstone's $10 billion deal in June for data center solutions company QTS Realty Trust, Bonser said such a transaction can have a ripple effect and generate interest throughout the industry.

"When a smart buyer like Blackstone enters a space like they did in data centers, it generally causes other people to take notice. And so as a result you're seeing a lot of attention on data centers," Bonser said.

In contrast, there isn't as much deal activity in the realm of office space as people are still figuring out what such buildings are worth in a post-pandemic world.

"There's not any clients I have that are increasing their office space, they're all looking at how to decline," Bonser said.

"There's a little bit more uncertainty on what an office building is worth than there is about what a data center is worth right now," he said.

Another aspect driving deals is that some REITs may be deciding that after being battered by the economic effects of the pandemic that it's easier to sell the business to a group with more resources than spend the years it may take to rebuild the company, Bonser said.

For instance, many REITs sought to save cash amid the pandemic by not investing in certain capital expenditures like property renovations, work that nonetheless must still be performed and paid for later on.

"Maybe somebody else is willing to pay them today a really good price and they don't have to go through that exercise of spending all that money to try to get the asset back up to top form," he said.

Additionally, Bonser said a REIT may decide that its portfolio is overly concentrated on the coasts when more opportunities are opening up in the South and West. And so in order to expand geographically, a company's executives may decide it's simpler to grow by combining with another business already in those regions, he said.

Similarly, a rise in the price of private real estate has led some REITs to realize it may be easier to further expand by acquiring a peer business than individual pieces of property, he said.

At the same time, some groups are also playing catch up of sorts after a year when pricing their assets was difficult due to a lack of information about how the pandemic would impact companies and general uncertainty from the outbreak.

Most companies don't want to sell when their stock price is low, and REITs who had to deal with their own prospects amid the worst of the pandemic may not have been in a position to buy, said Michael Brueck, partner at Kirkland & Ellis LLP.

However, now that stock prices have largely recovered, buyers and sellers in the REIT space are more likely to engage in large strategic mergers and acquisitions, he said.

"I think there's an increase in market confidence which will also drive people in the boardroom to be more comfortable engaging in large transformational transactions," Brueck said.

In July, Kite Realty Group Trust and Retail Properties of America said they were merging to form a massive REIT with an enterprise value of roughly $7.5 billion, forming a top five shopping center REIT by enterprise value.

The merged KRG will boast an operating portfolio of 185 open-air shopping centers with a total of 32 million square feet of owned gross leasable area.

Additionally, given the rise in stock prices, activist investors who largely sat on the sidelines in 2020 due to the uncertainty and the questions about how exactly to address struggling REITs have now returned, Brueck said, driving further deals activity.

"When the pandemic hit, it was hard for those activists to offer solutions," Brueck said.

"I think as the impact of the pandemic becomes clearer, at least in certain real estate sectors, I would expect to see a resurgence in activists approaching companies in the REIT space," he said.

By their very nature, REITs are more divisible and it's easier for them to engage in asset sales than companies in other sectors that cannot as easily shed business units, he said.

"In some ways, activists have more arguments at their disposal than in some other industries," Brueck said.

In early September, Columbia Property Trust said it struck a $3.9 billion deal, including debt, to sell itself to Pimco in a REIT transaction that marked the culmination of a strategic review sparked by an unsolicited bid from a third-party investment group.

In March, Columbia received an unsolicited roughly $2.2 billion buyout offer from a group of three investors that included real estate private equity firm Arkhouse Partners, and the REIT subsequently initiated a strategic review of its options, it said at the time.

With the appetite for deals returning, buyers are further encouraged by the relatively low cost of obtaining debt financing and the large amount of capital investors are looking to put to work.

"When you take that capital looking for a home, you take relatively low interest rates and capital markets conditions that allow cheap financing, and you take the recovery in various sectors, and I think those are altogether the ingredients for an active [mergers and acquisitions] market," said Julian Kleindorfer, global co-chair of the REIT industry group at Latham & Watkins LLP.

Deciding whether to buy a company is a math exercise, and if a deal is 70% financed with debt, whether the interest rate is 3% or 5% makes a difference on what one can pay, according to Bonser.

"When the cost of capital is cheap the way it is now, that facilitates deal making," he said.