REIT M&As Poised For Post-Pandemic Bounce Back
Until the coronavirus pandemic hit, REITs had a good run of buying each other after the Great Recession, along with portfolio acquisitions and other kinds of deals that tended to bulk up the size of their investment portfolios. The trend peaked in 2018, according to NAREIT, with $78.3B in deals, a total pumped up by Brookfield's acquisitions of GGP and Forest City Realty Trust.
Deal totals were down in 2019 at $25.9B, but they still roughly totaled the 10-year average. Then in 2020, the pandemic essentially stopped REIT M&A for six months or so, but with the prospect of a post-pandemic business climate in 2021, the odds favor a major rebound in deals, experts say.
“As capital markets continue to improve and investment strategies evolve to account for the post-pandemic landscape, REITs should have the opportunity to address strategic needs through M&A activity," CBRE Capital Advisors' Americas leader James Scott said. "The announcement of the Kimco-Weingarten merger is a notable example that bodes well for continued REIT M&A activity.”
Companies of all kinds tend to merge during periods of overall economic growth, which was certainly the case after the 2008-2009 recession. More than 464,400 M&A deals were completed worldwide during the 2010s, according to the Institute for Mergers, Acquisitions and Alliances, a nonprofit focused on M&A research, representing an aggregate deal value of $34.3 trillion, up 26% from the 2000s.
The potential for a 2021 REIT M&A boom is thus part of a much broader trend, PwC reports, noting that companies have trillions of dollars in cash and cash equivalents at their command in anticipation of buying opportunities. Low interest rates are another factor that might add fuel to the M&A fire before long.
"The REIT M&A market has not been entirely in remission during these last 12 months of the global pandemic — it is only announced deals that have been scarce," a Goodwin report says.
"The prospect of acquiring either whole portfolios or individual trophy assets at discounted pricing has certainly led to a variety of M&A discussions and offers, but deep disagreements between buyers and sellers [made] it difficult for deals to be reached," the report said.
Goodwin said that a total of 14 new REIT transactions have been inked since Aug. 1, 2020, with 10 of these involving multi-company rollup transactions of nontraded REITs by a common manager or sponsor. After Goodwin issued its report, Kimco-Weingarten became the 15th deal since August.
Throughout 2019, REIT acquisitions came at a steady clip and across property types. In the office sector, for example, Cousins Properties bought TIER REIT, and AXA Investment Managers acquired Northstar Realty Europe Corp. In industrial, the deal of the year was when Prologis snapped up Liberty Property Trust.
The momentum continued into pre-pandemic 2020, with Simon Property Group agreeing to buy Taubman Centers in the headline deal of that period, though the initial price was cut after some wrangling between the buyer and the seller after the pandemic hit.
The first major M&A of the pandemic period was when NexPoint Advisors acquired Jernigan Capital in the niche self-storage sector in August. Other deals followed, though not at the pace of 2019.
In March 2021, Blackstone Group and Starwood Capital joined to buy Extended Stay America for $6B. Though the hospitality sector has been hit particularly hard by the pandemic, the move didn't count as a contrarian play, as Extended Stay specializes in economy temporary housing for healthcare and other essential workers, and as such has done better than many other brands.
“Resorts are coming back, and a big resort portfolio would be of interest to us,” Starwood CEO Barry Sternlicht told The Wall Street Journal, calling Extended Stay a “bread-and-butter investment — this isn’t glamorous.”
“Capital continues to target the real estate sector with significant dry powder in private equity, recovering public equity pricing and good liquidity in the credit markets," Scott said. "Despite lower real estate M&A volumes in 2020, we expect appetite for the space to drive increased activity in 2021, as we start the next economic cycle."
The pandemic didn't change the fact that for REITs, size has its advantages. This factor was cited by both Kimco and Weingarten, which in April inked a merger deal that will create a $20.5B entity. The combined portfolio will include 559 open-air, grocery-anchored shopping centers and mixed-use assets, totaling about 100M SF.
"The combined company’s increased size and scale, together with its financial strength, should drive an advantageous cost of capital, allowing the combined company to more readily pursue value-creation opportunities," Weingarten Chairman and CEO Andrew Alexander said in a statement.
“We are experiencing robust and record-setting leasing demand in our portfolio, which has a lot of similar markets to Weingarten, which is one of the reasons why we felt the time was right to execute on this opportunity,” Kimco Realty Corp. CEO Conor Flynn told Bisnow.
Dry powder will also be an important factor going forward, driving acquisitions but also more portfolio deals. Again, the advantage will be with the larger REITs.
As a major player in industrial real estate, Duke Realty hasn't announced plans for any major acquisitions, but the company certainly is an example of one that has the wherewithal necessary to expand in its sector.
“The pandemic has accelerated the growth of the e-commerce industry and increased the need to expand and diversify supply chains," Duke Realty Executive Vice President and Chief Investment Officer Nick Anthony said. "As a result, many investors are increasing their allocations to logistics assets.
"We're seeing increased acquisition activity across the sector, especially for properties located in high-barrier markets near major population centers, which are expected to realize strong rent growth," Anthony said. "We have repositioned our portfolio over the last several years so that it can benefit from these tailwinds.”
Another investment option for investors is to form new REITs to take advantage of anticipated growth. In the affordable housing space, two of the largest Black-owned real estate investment firms, Avanath Capital and MacFarlane Partners, teamed last fall to launch the first public real estate company dedicated to affordable housing, Aspire Real Estate Investors.
For now, Aspire's initial public offering has been withdrawn, but the opportunity in affordable housing remains, according to Aspire, particularly in opportunity zones.
"These sectors historically have been fragmented in ownership and underserved by institutional capital, yet they comprise a majority of the U.S. multifamily market (by units) and offer strong long-term fundamentals to generate attractive returns for investors," Aspire said in a regulatory filing.
"We are doing some retooling — with the hope of a potential relaunch in the fall," Avanath Chairman and CEO Daryl Carter told Bisnow by email.
Provided economic growth continues on track in 2021, REITs will see a wide variety of opportunities, including growth in well-performing sectors such as industrial and multifamily, and continued expansion in specialty sectors like life sciences and data centers, Scott said.
"But there will also be recovery plays in lodging and leisure," Scott said. "Activity is likely in both the public market — notably SPAC transactions — and private markets, highlighted by further scaling of investment managers through acquisitions.”
One avenue for REIT M&A may indeed be special-purpose acquisition companies, also known as blank check companies, according to Goodwin partner Audrey Leigh, who pointed out during a NAREIT podcast in February that Simon Property Group recently filed for a SPAC, though for now interest in the investment vehicle has waned. Simon's SPAC has a target value of $300M, according to a Securities and Exchange Commission filing.
“REITs are also taking note of the recent SPAC activity,” Leigh said. “We think we’re going to be seeing a lot more REITs taking notice and taking advantage of this market. … There’s a lot of cash available for investment and people are recognizing that SPACs are a good way for investors to get access to private companies."