Greatland Gold (LSE:GGP)
Historical Stock Chart

From May 2019 to May 2024

The economic crisis has created a survival-of-the-fittest environment for U.S. real-estate investment trusts.

With many REITs trading at distressed levels amid a continuing credit crunch, experts say the stage is being set for merger and acquisition plays with stronger companies taking over weaker rivals.

"I do think that M&A activity will begin to accelerate this year," particularly if interest rates stay low, said Jay Leupp, a portfolio manager for Grubb & Ellis AGA Realty Income Fund, adding that he expects stock-for-stock mergers.

"For healthy REITs (with) higher earnings multiples, the acquisition of...companies with very low earnings multiples is extremely accretive," from an earnings and asset-value standpoint, Leupp said.

In a sign that a cycle of consolidation may be afoot, shopping center REIT Ramco-Gershenson Properties Trust (RPT) recently announced that it "received indications of interest" from third parties, including Equity One Inc. (EQY). The companies are trading roughly at $9 and $14 a share, respectively.

Most experts say the companies most ripe for acquisition are trading below $5 a share, including debt-laden General Growth Properties Inc. (GGP). Flirting with bankruptcy, the mall operator has long been mentioned as an acquisition target of rivals Simon Property Group Inc. (SPG), the largest U.S. REIT, and Westfield Group Australia (WFGPY).

Leupp noted that over 30% of REITs are trading below $5. "That's the most ever," he said.

Those distressed share prices run across all sectors. For instance, shopping-center REIT Developers Diversified Realty Corp. (DDR) is trading around $3 a share, while highly levered office property developer Maguire Properties, Inc. (MPG) is at roughly $1.50. Lodging REIT FelCor Lodging Trust Inc. (FCH) traded at $1.40 in recent activity.

The are currently 135 public REITs, which saw a boom during the 1990s as investors thirsted for yield. The relatively large number of public REITs has some experts thinking the market is oversaturated.

"There are way too many REITs. We don't need all of the REITs that we have," said Rich Moore, an analyst at RBC Capital Markets. "There will be some obvious winners and obvious losers because of this whole credit crisis."

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. Such companies typically focus on distinct areas of property, such as offices, retail or apartments.

Indeed, if credit markets don't thaw soon with the help of federal aid initiatives like the Treasury's Term Asset-Backed Securities Loan Facility program, or TALF, 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 it compiled from Goldman Sachs Group Inc. (GS) and Securities and Exchange Commission filings.

As credit remains tight, the market has been heartened by the ability of some REITs to successfully sell equity, including Simon Property, Kimco Realty Corp. (KIM) and ProLogis (PLD). Selling equity is seen as an effective tool for strong companies to raise funds to help pay down hefty debt while keeping balance-sheet pressures at bay.

The year "2011 will become more of an issue I believe in the fourth quarter of this year and the first quarter of next year," said Grubb & Ellis' Leupp. "I don't think many companies are effectively going to be able to extend (2011) maturities at this point."

However, he said it's too early to tell how the scenario will play out.

-By A.D. Pruitt, Dow Jones Newswires, 201-938-2269, angela.pruitt@dowjones.com