U.S. property M&A to be active, IPOs not so much

By Ilaina Jonas

NEW YORK (Reuters) – U.S. real estate merger and acquisition activity has rebounded strongly this year and is likely to keep percolating, investment bankers at the Reuters Global Mergers and Acquisition Summit said on Wednesday.

But megadeals or large initial public offerings of private companies such as Hilton Hotels or apartment owner Archstone are not likely to appear this year, they said.

“I think there’ll be a number of deals in the $500 million to $1.5 billion size, and maybe REITs (real estate investment trusts) will buy them, and maybe private equity buys them,” said Jackson Hsieh, UBS vice chairman and global head of the Real Estate, Lodging & Leisure Group.

U.S. real estate merger activity picked up in the latter half of last year, with 290 deals worth $40.24 billion announced in 2010. That rocketed to 81 deals worth $37.96 billion in first-quarter 2011, as both the public markets and large U.S. investment banks have been eager to jump in with the range of funds needed to do a deal.

Large deals included acquisitions by healthcare REITs, such as HCP Inc’s (HCP.N: Quote, Profile, Research) $6.1 billion takeover of HCR ManorCare, and the $8.7 billion merger of warehouse and distribution center owners AMB Property Corp (AMB.N: Quote, Profile, Research) Property and ProLogis. (PLD.N: Quote, Profile, Research)

REIT M&A deals are unlike other corporate deals because many REITS are still controlled by the families that started them, infusing an emotional aspect into whether to be acquired, said David Lazarus, senior managing director and co-founder of EdgeRock Realty Advisors.

In addition, most types of commercial real estate, other than malls and distribution centers, do not lend themselves to the kind of cost cutting seen in other corporate mergers.


Private equity firms may be looking for bigger deals to spend the roughly $170 billion of committed capital they have raised, Hsieh said. They may buy properties so they can raise more funds to spend.

“I think we’ll start to see that in the next 18 months, and I think that’s going to start to accelerate deal activity,” he said.

Blackstone Group LP (BX.N: Quote, Profile, Research) recently agreed to buy nearly 600 U.S. portfolios of U.S. shopping centers from Australia’s Centro Properties Ltd (CNP.AX: Quote, Profile, Research) for $9.4 billion and already is raising another fund.

Other private equity players such as TPG Capital LP (TPG.UL: Quote, Profile, Research) and KKR & Co (KKR.N: Quote, Profile, Research) also are looking to bulk up their real estate under management.

“A lot of private equity firms have evolved into asset managers,” Lazarus said. “One of the easiest metrics to look at is the percent of assets under management. There is a correlation to assets under management and the value of your firm.”

Although the public markets have greeted most of the real estate M&A deals with open arms, investors have spurned most of the sector’s initial public offerings, Lazarus said.

There have been a dozen U.S. real estate initial public offerings of both mortgage and property REITs since January 2010, raising $2.9 billion or about $236 million per company.

Most saw their shares down about 8 percent 15 days later, Hsieh said. They have underperformed the benchmark MSCI U.S. REIT Index (.RMZ: Quote, Profile, Research) by about 25 percent, Lazarus added.

“They are really setting the bar very high as what they will accept from a new public company,” Lazarus said.

Investors want companies that either have been public or that have a management team that has operated a public company, Lazarus said. They demand that the underlying assets be high-quality and located in U.S. coastal markets, where rents are higher and vacancies are lower.

They also want companies with bigger, more liquid market capitalization that enable investors to move in and out of the stocks quickly.


Two companies that could fit that criteria are Hilton Hotels or apartment building owner Archstone. But their current owners are in no hurry to send the companies into the public world, said Lazarus, who helped take Archstone private in a $22 billion deal 2007, when he was a managing director in Lehman Brothers Global Real Estate Group. The deal helped sink the financial company into bankruptcy.

A Blackstone-run fund bought Hilton in 2007 and the company is generating enough cash flow to service its debt, the bankers said.

“If you didn’t have to, why take it public in this environment when your expectation is that fundamentals are getting better, lodging fundamentals in particular are better, and the economy getting better?” Lazarus said of Blackstone.

Archstone faces a different set of circumstances, primarily that it is part of a bankruptcy and is owned by three banks: Lehman Brothers, Barclays Plc (BARC.L: Quote, Profile, Research) and Bank of America Corp. (BAC.N: Quote, Profile, Research)

“I think those owners are going to be more motivated to hit a market window with respect to Archstone than the Hilton owners are going to be,” he said.

(For more on the Reuters Global Mergers and Acquisitions Summit, see [ID:nN01283917] )

(Reporting by Ilaina Jonas, editing by Matthew Lewis)

U.S. property M&A to be active, IPOs not so much