Monday, May 4, 2009


You would think that a real estate investment bank, by definition, would be right in the mix for any mergers and acquisitions deals involving the more than 130 Real Estate Investment Trusts that exist today. Sorry to disappoint, but that's not really what we do. That being said, there has been more and more speculation, A. D. Pruitt of the Wall Street Journal Online being one of the loudest and most recent, that REITs will go the M&A route.

One of the biggest and most obvious reasons for this is that many REITs are struggling right now, saddled with too much debt from frothy acquisition plays they made during the boom years of 2004-2007. Better positioned REITs, in an ironic twist, may be well suited to acquire the struggling REITs because they are lower levered and can take on some of the debt burden that would come with acquiring such a massive entity.

Of course, there is a more prudent approach given the way everything seems to be going more slowly and more judiciously in the current environment. Stronger REITs may elect to simply wait until the weaker REITs fail and go bankrupt so they can simply bid on portions of the distressed assets available at auction in order for the failed REITs to pay creditors. Just like vulture funds, they might have their pick.

However, given that many trophy assets may or may not be available for sale under bankruptcy proceedings, healthy REITs may simply elect to acquire they entire company.

General Growth Properties will be a very interesting case study. While many had speculated that its biggest rival, Simon Property Group, was going to acquire it last month, instead GGP filed for bankruptcy. The courts and creditors will now ultimately determine which properties in GGP's portfolio will be made available to the public for sale.

REITs, which own about $600 billion of commercial real-estate assets, were established in the 1960s to give individuals an easy way to invest in income-producing real estate. If credit markets don't thaw soon with the help of federal aid initiatives, some companies will be hard-pressed to survive if they can't refinance their debt. The outlook gets more dire in 2011 when $500 billion of commercial real-estate maturities come due, according to a report from the National Association of Real Estate Investment Trusts, citing data from Goldman Sachs Group Inc. and Securities and Exchange Commission filings.

With more than 30% of REIT stocks valued under $5 a share, there are certain to be many, especially those who can't raise equity through public offerings, who will bow out of the race.

My question to you is, given that REITs amazingly only own about 6% of the total volume of commercial investment properties nationwide, how much of an impact on the commercial real estate market would it have if 10-20 of them went belly up?

1 comment:

bill said...

I'd be curious to know the source of the 6% statistic. $10 trillion seems too high of a denominator. (600B/10T=6%). I'm probably missing something.