If Mills Corp., the publicly held real estate investment trust developing the Block 37 project in downtown Chicago, succeeds in its effort to sell all or part of its mall property portfolio, the buyer could well be a private entity.
For about a year, private money has been snapping up big public REITs. For instance, on June 5 it was announced that Chicago-based Trizec Properties Inc. has been sold for $8.9 billion to a team that derived the lion’s share of its financing from the private Blackstone Group of New York.
“Public REITs are disappearing,” said Tony Smaniotto, a senior vice president at CB Richard Ellis. “They’re being taken private because their stock price is lower than the value of the buildings.”
Apparently, Trizec’s buyers agreed enough with that assessment to pay a premium of at least 18 percent over the REIT’s stock price.
Similarly, in March, Oak Brook-based CenterPoint Properties Trust was purchased for $3.4 billion by joint venture CalEast Industrial Investors LLC for a 9 percent premium over its stock price, said Daniel Witte, a managing director of LaSalle Investment Management Inc. LaSalle is a partner in the venture with the California Public Employees’ Retirement System.
Paying the premium is a way to entice all REIT shareholders to sell. Meanwhile, running a private company streamlines operations by decreasing government reporting and regulatory requirements.
Although public REITs might not go the way of the buffalo just yet, the privatization trend will probably continue, said Abigail McCarthy, the research director for the National Association of Real Estate Investment Trusts.
“The privatization trend doesn’t appear to be slowing down,” she said. “But it isn’t just REITs that are being taken private, it’s happening [to companies] all across the board.”
So far this year, she noted, the value of REIT sales to private entities that have closed is $15.9 billion, or 36 percent of the value of all REIT sales. That’s up from $252 million, or just 2 percent, in 2004, McCarthy said.
Investors clamoring for real estate include those “burned by the stock market downturn in 2000 and watching as home values rose to almost unprecedented levels,” said Andrew Engel, a portfolio manager and senior analyst at the Leuthold Group LLP of Minneapolis.
Private capital will continue to flow into public REITs because many now have 50 percent debt and 50 percent equity. In private property firms, often about 75 percent of their value is debt, while only 25 percent is equity, said Arthur Oduma, a real estate analyst for Morningstar Inc.
“At a time when debt is still relatively cheap, private equity players are attracted to these deals because they can buy the properties and leverage them [with more debt],” he said.
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Supply and demand also can make buying a big portfolio a better bargain than buying a single building.
“Many people can afford to buy one property, but few can afford to buy a portfolio,” said Oduma. “With less demand, a portfolio is cheaper [per square foot] than a stand-alone building.”
Privatization will continue until rising interest rates make debt too expensive or other assets become more attractive than real estate, Oduma said.
“Despite high real estate prices, public REITs are still undervalued,” he said.
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