- Upheaval in the commercial real estate market has pushed down REIT prices, creating the opportunity for billions of dollars of privatization deals in 2021.
- Underscoring the potential activity is a long-term dislocation between commercial office REIT share prices and the net value of their property holdings, which has been exacerbated by the pandemic.
- Over $300 billion has been amassed globally to do real estate deals, money that could pour into privatization transactions.
- Major buyers who could take REITs private, such as Blackstone, have said they’re optimistic about a long-term rebound for assets like offices that have been weakened by the virus crisis.
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Upheaval in the commercial property market stemming from the pandemic could create an opportunity for buyers willing to place multibillion-dollar bets on its long-term turnaround.
That’s what Brookfield Asset Management, the $575 billion Toronto-based alternative asset firm, is counting on in its offer to privatize Brookfield Property Partners, a nearly $16 billion REIT that trades under the ticker BPY and controls millions of square feet of office, retail, and residential space in major cities across the country.
On Monday, Brookfield, already the majority shareholder in BPY, offered $5.9 billion to acquire the company’s remaining shares, a 14% premium to where the stock was trading on the Nasdaq on December 31.
Analysts who cover the REIT sector say the deal could be a bellwether for more privatizations to come in the industry.
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“There will be increased activity this year,” said John Kim, a REIT analyst at BMO Capital Markets. “There were some deals that could have been done last year, but were difficult to underwrite amid the pandemic. That could change as the market stabilizes in 2021.”
Executives of public real estate companies have griped for years that shareholders have undervalued their companies’ property holdings. The pandemic has heightened the tension by sending REIT stocks tumbling even further, especially those with portfolios like BPY’s that are concentrated in troubled segments of the property market, such as office and retail.
REIT shares overall have fallen almost 11% in 2020, according to the FTSE Nareit All Equity REIT index. This decrease in share prices has made public companies potentially even more attractive for takeover deals.
In November, for instance, investment firm Bow Street LLC made a $10-per-share offer for Paramount Group, a New York City-based $2 billion REIT that owns a collection of office buildings in Manhattan and San Francisco. Paramount’s board rejected the bid as undervalued, despite the fact that its share price had dipped as low as $5.54 earlier that month. In the months before the pandemic, Paramount shares had been trading between $12 to $15 per share.
“While we are pleased Bow Street recognizes that Paramount’s value significantly exceeds the value implied by current trading prices, the board determined that Bow Street’s proposal is wholly inadequate,” Albert Behler, Paramount’s chairman and CEO, said in a statement at the time.
Some observers have warned that REITs could be similarly wary to accept bargain pricing during a dip in the market.
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“Most REITs and boards won’t agree to privatization offers at deeply discounted prices given [the] proximity of vaccines and snapback economic activity expected in 2021,” said Ron Dickerman, president of Madison International Realty, an investment firm that has acquired major positions in REITs such as Mack-Cali.
Diminished share values in the office sector could persist, however, other experts point out. Some major office users, such as Facebook, have said they will adopt remote work going forward, potentially reducing future office demand, weakening rents, and pushing down property values.
“If it’s six months from now and the share prices still haven’t changed, management teams are going to be like, ‘What do we do now?'” a senior NYC REIT executive told Business Insider, speaking on background because he didn’t want to be identified disparaging the industry. In that scenario, “we can’t continue to blame Covid.”
Such an elongated recovery could serve as a reckoning for companies that have struggled to bring their shares in line with underlying value.
Shares of SL Green, an office REIT with a portfolio concentrated in New York City office space, for instance, were trading at a 38% discount to the company’s estimated net asset value, or NAV, on December 31, according to BMO Capital Markets data. A year prior, shares were at a smaller, but still substantial, 21% discount to consensus NAV.
The continued dislocation between private and public market value for SL Green was laid bare by the company’s $953 million sale of the Manhattan office building 410 Tenth Avenue in November. The sale priced the office property at a roughly 4.5% yield for the buyer, according to BMO analyst Kim. Shares for the firm, meanwhile, price the company’s multimillion-square-foot real-estate portfolio at below-market values that equate to a far higher yield of 8.5%, Kim estimated. Cap rate yields grow as property values fall.
In recent years, SL Green has spent over $3 billion buying back its stock out of a belief its shares are undervalued. That effort now adds to the speculation the company could be a privatization candidate.
“When a company is engaging in significant buybacks, they’re putting up a flag to say that privatization is on the table,” said Laurel Durkay, head of listed real assets at Morgan Stanley Investment Management.
SL Green did not respond to Insider’s requests for comment.
Meanwhile huge amounts of capital have been raised for real-estate acquisitions, creating the wellsprings of cash needed for privatization deals.
There was nearly $324 billion of such capital globally as of December, according to data from Preqin. That’s more than 40% more private capital on the sidelines than in 2015, a banner year for privatization deals in the REIT sector, when nearly $30 billion of buyouts took place, according to data from Green Street Advisors.
Huge real-estate buyers, including Blackstone, have expressed optimism about a long-term property rebound, a signal that it could be a potential suitor in upcoming privatization deals.
“Over time, we think people will return to office buildings,” Jon Gray, Blackstone’s president and chief operating officer said in the company’s second-quarter earnings presentation. “It’s very hard to run businesses remotely. If you fundamentally believe this is more cyclical in nature, as we do, in categories like office or in hotels, then you should have a good opportunity to deploy capital.”
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