No IPOs, REITs Going Private: The Shrinking World Of Publicly Traded Real Estate

For a stock market investor looking to buy into the student housing sector — much like a college student who procrastinated finding an apartment for the fall semester — there could soon be no more options. 

That’s because American Campus Communities, the lone publicly traded student housing REIT in a segment that five years ago had three such companies, is set to be acquired by Blackstone in a deal announced in April and expected to close this quarter. 

This deal is part of a larger wave that has accelerated over the last year of public REITs being taken private by investment giants, as tens of billions of dollars have flowed into funds operated by firms like Blackstone, Starwood and KKR. The stock market downturn has made these deals more attractive for buyers because REITs can be acquired at a relative discount to the private market value of their portfolios. 

This take-private movement is happening at the same time as a dramatic drop in the pace of initial public offerings for REITs, new research from JLL shows, and these coinciding trends are shrinking the universe of publicly traded real estate owners. 

“What that does is it gives you less transparency,” JLL Managing Director Sheheryar Hafeez said. “You’re not going to be able to easily understand the asset class from public data.”

Since the start of 2018, there have been 20 take-private deals totaling $86B in value, with $22B of that coming from BREIT, Blackstone’s nontraded REIT vehicle, according to a report JLL released Wednesday. During that same period, the report found there have been 15 IPOs for new REITs that raised a total of $5B.

Through the first six months of 2022, there have been zero IPOs for new REITs — the first time that has occurred since 2001, according to additional data JLL shared with Bisnow and attributed to Nareit. Even during the Great Financial Crisis, there were two REIT IPOs in 2008 and 11 in 2009, according to the data. There have been five take-private deals through the first half of this year totaling $21B, with more than half of that coming from BREIT. 

“With a listed stock, you could buy and sell it in minutes, in basically any quantity you want, and you’re getting that pure-play exposure. It’s very convenient. It’s great for investors,” said John Worth, Nareit executive vice president for research and investor outreach. “With BREIT, of course, you have less liquidity than you have with a listed stock, so it’s not as easy for investors to get access to it, and it’s not a pure-play investment. You’re getting their diversified portfolio.”

Green Street, a research firm that analyzes public real estate companies, is reducing the number of REIT sectors it covers from 18 to 17 because the Blackstone-ACC deal is taking the last pure-play student housing owner off the stock market, co-Head of Strategic Research Dave Bragg said. 

“The lack of choice, a slightly lower ability to diversify across property sectors, that’s a negative implication,” Bragg said of the ACC deal.

A Blackstone spokesperson said in a statement emailed to Bisnow Saturday that BREIT’s fund structure will help ACC expand its portfolio. 

“Our scale and long-term capital enable us to acquire and grow platforms over time,” the spokesperson said. “In the instance of American Campus Communities, our perpetual capital will help ACC invest in its existing properties, expand relationships with universities and create much-needed new student housing.”

Blackstone’s $12.8B purchase price for ACC, announced April 19, represented a 14% premium compared with the company’s closing stock price the prior day. The parties said in April they expect the deal to close in Q3. 

Alexander Goldfarb, an analyst with Piper Sandler who covers ACC, said he thinks being the only public company in the student housing sector put ACC at a disadvantage.

Its competitors didn’t have to worry about the falling stock market bringing down the value of their equity, and private firms have the luxury of not having to report financial performance every quarter, allowing them to focus more on the long term. And he said investors don’t like having to study up on an entire sector if there is only one company available to buy.

“Unfortunately, in REIT land, when you are the only stock in a sector, it creates a challenge because unless you’re a really big company, it becomes hard for investors to invest in you,” Goldfarb said.

This dynamic could mean that other REITs in niche property sectors could be undervalued on the stock market and attractive for take-private deals. 

Bragg said he sees possibilities for other sectors to disappear from the stock market. He pointed to cold storage as an example of a sector with just one publicly traded REIT that Green Street covers: Americold. Sectors with just two publicly traded REITs, Bragg said, include manufactured housing, single-family rental and data centers. 

“There are some other REIT sectors that are just represented by one or two companies, so should that continue, should there be more instances like that, then public market investors would lose some access to certain property sectors in public markets,” Bragg added. 

The data center sector had five public REITs at the start of last year, but then three major deals brought it down to two: Blackstone’s $10B acquisition in July 2021 took QTS private, KKR’s $15B deal in November took CyrusOne private, and infrastructure REIT American Tower’s $10B acquisition of CoreSite closed in December. 

The student housing REIT sector’s impending disappearance from the stock market began well before the ACC deal was announced in April. In 2016, private equity firm Harrison Street Real Estate Capital acquired Campus Crest Communities for $1.9B. In 2018, private multifamily giant Greystar acquired student housing REIT EdR for $4.6B.

Taking an entire real estate sector off the stock market reduces the amount of data available on that asset class. Publicly traded REITs disclose a host of financial information on their portfolios that private companies aren’t required to reveal. 

For example, a look at ACC’s Q1 earnings supplement shows that occupancy across its 166-property student housing portfolio averaged 94.8% that quarter, up from 87.6% in Q1 2021. It also breaks down its operating expenses by category, so the public can see how much its maintenance or payroll costs rose during a given quarter. And it reports rental revenue per bed for each property, such as the Castillan apartments at the University of Texas Austin, which averaged $1,320 in monthly revenue per bed last year. 

“The fact that companies are public gives investors a real window into what happens not just in that company but in that industry, and you don’t get that with any private company,” said Georgetown University professor Jonathan Morris, who teaches a master’s-level course on REITs and worked for multiple public REITs during his career. 

“If you have a private portfolio of any given asset class and you decide to do some homework, you can go online and look at the public REITs in the sector you own assets in, you’re going to be pretty well-served by understanding how they approach different things,” Morris added. 

The likelihood of another real estate sector disappearing from the stock market depends on a variety of factors, but experts believe the market forces that have been reducing the roster of publicly traded REITs will continue to exist in the coming quarters. 

These deals have been driven in part by the record amount of capital that firms have raised into nontraded REITs, a type of perpetual investment vehicle that has become increasingly popular with investors in recent years because they don’t have the volatility of publicly traded REITs. 

Nontraded REITs raised $18.9B through the first five months of this year, up from $10.7B during the same period in 2021, which was a record year for the sector’s fundraising, according to data from Robert A. Stanger & Co. and reported by The DI Wire. Blackstone has raised the most money into nontraded REITs this year at $11.6B, followed by Starwood Capital at $3.3B, FS Investments at $801M, Ares Real Estate Group at $662M and Nuveen at $588M. 

With billions pouring into the funds, these investment managers need to find ways to deploy large amounts of capital into commercial real estate at once, and buying public REITs is an efficient way to do that, JLL’s Hafeez said. 

“They get assets that are producing cash flow today, and frankly, the way the REITs have operated over the years, they have become a lot more institutional, the management teams have done good job of pruning the less stable assets and they are in a position from a capital structure standpoint to be an ideal candidate for a take-private,” Hafeez said. 

These deals are especially attractive when a public REIT is trading below the perceived private market value of its portfolio, referred to as a discount to net asset value, or NAV. 

The broad decline in the stock market, with the S&P 500 down nearly 20% on the year as of Friday, has substantially brought down the prices of many REITs. The worsening outlook for the economy could also bring down private asset prices, but experts said the public market drop has overshot the pain that REITs are facing, creating wider discounts to NAV across asset classes. 

“Has private real estate gone down 20% this year? No,” Goldfarb said. “Private real estate is valued differently than public, meaning people take a more holistic look at it.”

JLL’s Wednesday report, citing Nareit and Real Capital Analytics data, estimated that the market’s discount to NAV is 8.3% in the industrial REIT sector, 10% in the data center sector, 14.5% for self-storage, 25.7% for multifamily, 29.6% for hotels, 32.7% for retail and 45.5% for office. 

PS Business Parks, a REIT that owns office and industrial properties, was trading down by about 10% on the year before Blackstone announced a deal April 25 to acquire it for $7.6B. PS Business Parks' shareholders approved that deal Friday.

The growing discounts make REITs more attractive for investment firms to take private, Hafeez said, but they aren’t the only factor that buyers consider. They also take into account the stability and growth prospects of the asset class they are buying.

These take-private deals have also become harder to close as interest rates have begun to rise this year, Hafeez said, as the acquisitions typically include large amounts of debt. He said the uncertainty around how high the Federal Reserve will take interest rates could slow these acquisitions in the short term. But once it becomes clearer where rates will stabilize, Hafeez said buyers will be able to price the higher rates into the deals.

“Once the volatility dissipates and if the discount still exists and there’s availability of debt, then it’s a pricing exercise more than anything else,” Hafeez said. “You can see the capital that has been raised. … The capital is there, they just have to be a little more patient.”

The trend of REITs being taken off the stock market does create opportunities for private players that want to go public to fill the void, experts said, but the REIT IPO landscape has been unusually quiet. 

When private real estate owners look at how far the values for their publicly traded counterparts have dropped this year, the idea of going public doesn’t seem appealing, Hafeez said. 

“In 2022, it’s the perfect storm for why a lot of these IPOs wouldn’t work,” Hafeez said. 

This year has seen a broad slowdown in IPO activity across the stock market, but Bragg said the REIT sector was even slow last year. According to the Nareit data that JLL shared, 2021 saw four REIT IPOs that raised a total of $837M, the second-lowest total since 2008. 

Previously, Bragg said that private equity firms would take some real estate firms public in addition to buying out public REITs, a dynamic that kept the number of public REITs somewhat stable. But that dynamic has changed. 

“Last year we saw a good amount of IPO activity in the broader market, but the REIT market did not really participate in that,” Bragg said. “What used to be a two-way street between the public market and private equity in real estate looks more like a one-way street now.”