Philip F. Blumberg of American Ventures on why REITs are Feeling the Heat
High break up values mean REITs are ripe for acquisition, says Philip Blumberg.
Coral Gables, FL (PRWEB) May 31, 2007 -- Philip Blumberg noted in a recent article that Real Estate Investment Trusts, commonly known as REITs, are being acquired at an accelerated pace by private buyers. But it's likely that even more public-to-private deals will follow as investors rush to buy properties on the public markets in leveraged deals to tap break-up values. Fortunately for the buyers, the public market is naively determined to continue to view and value REITs as operating companies rather than for what they are: collections of assets.
Just as buy-backs are shrinking the available pool of high quality equity, the REIT world is shrinking considerably and is not being replaced -- they have access to capital, but not in significant amounts. REITs also can't store cash nor buy back their shares. From an LBO point of view, they're an agglomeration of underutilized, undervalued assets ripe for the picking.
The acquisitions you're seeing now reflect the difference between REIT breakup value (book value) and their equity value (market value). This differential led to Blackstone Group's $39 billion acquisition of Equity Office Properties. But it's not only in commercial real estate that we see this logic: Earlier this year, Kohlberg Kravis Roberts and the Texas Pacific Group offered a record $45 billion for TXU; and Cerberus Capital Management recently announced a $7.4 billion deal to take control of Chrysler. In fact, Thomson Financial reported that, last year, 205 private equity funds raised more than $174 billion. Clearly, the market is adjusting its perceptions of the value of privately managed assets versus those that are publicly held.
REITs -- like Equity Office, for example -- are inefficient structures for commercial property ownership. Here's why:
1. Corporate Structure. The downside of a REIT's main benefit -- an inherent tax advantage -- is that the REIT corporate structure is burdened with severe limitations in terms retaining cash (which severely undermines options against possible takeovers) and restraints on operating freely (which constrains monetization options).
2. Management. REIT managers frequently have to manage for the equity markets' quarterly expectations rather than for the long-term opportunities of the commercial real estate market; the resulting mismatch between corporate- and asset-management policies distorts investment decisions.
3. Valuation --- REITs are mistakenly seen as operating companies by the public markets, which value them as a blend of aggregate cash flow, corporate strategy, and public market and sector interest. This simplistic approach ignores the sum of the breakup value of the individual assets -- which, in a real estate context, is really all that a portfolio of properties consists of.
All this makes REITs good takeover targets. For this reason, companies like American Ventures include the ability to acquire REITs in current open-ended funds. In fact, American Ventures Realty Investors is considering launching a real estate hedge fund to specifically target REIT acquisitions.
Philip Blumberg Fields a Common REIT Question
Question: "What would it take for the dynamic to shift back in favor of the public markets?"
An externality, something not intrinsic to the commercial property market, could force that change. A large portfolio of residential properties can be treated as a fungible asset. In the commercial world, however, every property is unique and therefore harder to securitize. The worst case scenario would be to take public an illiquid, asset-based company with a unique set of market drivers and focus it solely on quarterly returns. Owners will never be able to take a long-term perspective, nor have management flexibility. The private market allows far greater scope for taking carefully calculated chances.
Advice for investors looking to exploit the current roll-up of REITs is to look for specialty office REITs that are regionally focused -- anywhere where there is strong market interest. If you select a good public REIT office property, not only do you get a good asset but aggressive private real estate companies will view it as vulnerable to a takeover. In any case, by shifting a REIT portfolio to the private market, the assets are moved into a more consistent management environment and investment horizon. You don't need to buy a $10-billion REIT either; there are plenty of attractive assets in the $100M - $500M range. We ourselves made an unsuccessful run at the News Corp. building in Manhattan with a $1.2 billion bid last year, but it's not necessary to spend that kind of capital on a REIT.
This article is the latest in a series authored by Philip F. Blumberg, Chairman & CEO of Coral Gables, Fla.-based American Ventures. The next article will be a detailed look at the top five points for sizing up a potential REIT acquisition.
About Philip F. Blumberg
Philip Blumberg is Founder, CEO and chairman of the American Ventures group of companies, which operates real estate investment funds for corporate pensions, foundations, banks and other institutional investors. His professional memberships include the Urban Land Institute, the National Council of Real Estate Investment Fiduciaries, the National Association of Industrial and Office Properties, the Pension Real Estate Association, the Institute of Real Estate Management and the Builders & Owners Management Association.
Philip Blumberg holds and has held many civic and not-for-profit positions including serving on the Board of Governors and Board of Directors of the Florida Chamber of Commerce, on the Board of Directors of the Beacon Council and the Florida Council of 100, Vice Chairman of the Board of Directors of the Greater Miami Foreign Trade Zone, Chairman of the Greater Miami Chamber of Commerce 2000-2001, member of the Westshore Alliance, the Tampa Bay Partnership, the Miami Business Forum, the boards of Miami Dade Community College Foundation, the Community Partnership for Homeless, WAGES, the Orange Bowl Committee, the University of Miami Board of Trustees, the chairmanship of the City of Miami's Botanical Gardens Selection Committee, co-Chairmanship of the Olympic Soccer Organization Committee of South Florida, and membership of Miami's Blue Ribbon Task Force on City Administration.
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