Seeking Better Share Prices, REITs Rack Up $22B In M&A

Upheaval seems to be the new normal in the real estate industry, at least for now, and as they try to navigate the changing tides, REITs are seeking safety in numbers through mergers and acquisitions, with several major marriages taking place so far in 2023.

Five real estate income trust acquisitions totaling about $22B occurred in the first five months of this year, putting it on pace to beat 2022 in deal count, if not dollar volume, as REITs look to boost their share prices or insulate themselves from market shocks. 

“REITs aren't pleased with where their share prices are, but they can still do public-to-public mergers because those are relative value transactions,” CBRE Capital Advisors Americas leader James Scott said. “When you see one public REIT do a stock merger with another public REIT, the buyer's share price may be low, but the other company's share price is low as well. So we've seen those share-for-share deals continue.”

But relatively low share prices — the FTSE Nareit All Equity REITs Index is down just over 20% year-over-year — don't mean that REITs are selling from a position of distress, according to Nareit Executive Vice President, Research and Investor Outreach, John Worth.

“We're not seeing distressed take-privates, just like we didn't see that early in the Covid period,” Worth said. “REITs have the balance sheet strength to perform well in a period of higher interest rates, like they were able to perform through Covid. So there isn't going to be bargain hunting for REITs, because they understand their intrinsic value, and they're going to make sure that they get that intrinsic value out for their shareholders.”

Most REIT M&A has been and will continue to be strategic in nature, Scott said, with companies carefully weighing their options about which combinations will make them more competitive. That points to a steady flow of M&A going forward that matches what the market has seen over the last two years.

In 2022, there were nine REIT-on-REIT deals totaling about $69.1B. Far and away the largest was Prologis swallowing Duke Realty Corp. in a $25.4B deal. And in 2021, there were 10 deals totaling $71.3B that saw REITs acquire other REITs, according to Nareit.

Strategic reasons for M&A abound in a complex economic situation, experts told Bisnow. The economic realities of 2023 are markedly different, with high interest rates and sluggish deal volume weighing down the CRE industry and REIT share prices, but that isn't going to derail the measured pace of REITs buying other REITs.

The M&A activity so far this year illustrates the various strategies buyers are implementing.

By acquiring Diversified Healthcare Trust, which owns healthcare, life sciences and senior housing properties, Office Properties Income Trust is looking to diversify away from traditional office assets and into more stable property types.

In the case of Regency Centers buying Urstadt Biddle, a much larger entity bought a smaller one for access to a strong regional market, in this case suburban New York City.

“The portfolio that Urstadt Biddle has carefully assembled over the more than 50 years offers a highly aligned demographic and merchandising profile to Regency,” Regency Centers CEO Lisa Palmer said in a statement.

“Regency was a logical buyer,” Wide Moat Research CEO Brad Thomas said, adding that consolidation will continue in the REIT space as larger operations scale upward through acquisitions.

In the year's largest REIT M&A so far, Extra Space Storage paid $12.7B for Life Storage, representing yet another factor in the equation: consolidation in a niche real estate market for improved operating efficiencies.

“This is an industry where scale really matters,” Extra Space CEO Joseph Margolis told The Wall Street Journal when the deal was inked.

Another niche ripe for consolidation is net lease, Thomas said, with more than a dozen REITs still in the space. One of this year's deals involved Global Net Lease buying the Necessity Retail REIT to create the third-largest REIT in the specialty.

Much of net lease involves retail, a property type that was considered on the skids until recently, though shopping centers with grocery anchors did a lot better earlier in the pandemic because they were necessity-based, Jefferies Senior Analyst for the U.S. REIT Team Linda Tsai told Bisnow.

REITs specializing in office, on the other hand, might not be the target of much M&A activity as long as the future of the asset class remains uncertain.

“The markets are trying to figure that out right now,” Scott said. “But if you look back to the retail sector three years ago, you would have been saying the same things you're saying about office now. What happened in retail is there were some well-performing sectors like grocery-anchored, and the market eventually acknowledged that and started investing in it or transacting in it.”

So far, the pattern of REIT M&A in 2023 is shaping up to be roughly the same as during the last two years, with a number of smaller deals punctuated by a handful of massive ones that kick the total volume upward dramatically and maintain the overall market share of REITs as an investment vehicle.

“The size of the REIT industry really isn't going down,” Scott said. “There are new entrants to the market since the value proposition for REITs remains in place. Acquisitions will continue, and I think it's healthy to see what I call the Darwinlike survival of the fittest, where you see companies get stronger through these deals.”