REITs to remain acquisition targets
REITs to remain acquisition targets
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Barry Critchley | 13/04/02 | Last Updated: 13/04/02 5:30 PM ET
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FotoliaREITs and/or real estate operating companies will continue to emerge as possible acquisition targets as potential buyers seek to take advantage of a very favourable environment including low interest rates and cheap cost of capital.
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If the team at M Partners have called it right, REITs and/or real estate operating companies will continue to emerge as possible acquisition targets as potential buyers seek to take advantage of a very favourable environment including low interest rates and cheap cost of capital.
Indeed, Brendon Abrams, the firm’s REIT analyst, has identified three possible targets: Pure Industrial REIT, BTB REIT, and Regal Lifestyle Communities Inc. If those three are acquired, then it will bring to 11 the number of REITS that have been bought since the start of 2012. Of the other eight, three (Primaris, KEY and C2C) are in the process of closing.
“All investors are looking for the next takeout candidate,” said Abrams, noting that in the meantime investors are “being paid to wait given that REITS pay an attractive yield.”
In coming up with that list, Abrams focused on REITs and REOCs that have a market cap of less than $1-billion “as historically these are the most likely to be acquired given their relative size.”
In selecting the three most likely takeout candidates, Abrams selected from a 30-strong list that ranges from Extendicare (market cap of $698-million) to Lanesborough REIT ($14-million.) Of the 30 firms, seven have a market cap of at least $500-million, while seven have a market cap between $100-million — $200-million.
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Accordingly there was lots of culling involved. Cuts were made because those on the list didn’t meet any of the criteria set up by Abrams. Those criteria included: an asset base that would be appealing to a large entity; a valuation that is attractive relative to its target’s underlying assets; the extent to which the target is levered or has the potential to refinance at lower rates; the extent to which synergies are involved and the degree to which ownership is concentrated or widely spread.
Notes Abrams: “Having large shareholders who are also the founders/management may present a greater challenge to a potential acquisition, while having a broader base of institutional investors and retail investors, whose primary concern is stock price, may be more accommodating.”
That element was felt to be a negative factor in at least two issuers on the list, Mainstreet Equity and Retrocom REIT, where one shareholder has a large block of stock.
In an interview, Abrams painted three driving forces behind potential acquisitions:
— The larger REITs need to be get bigger, all of which means the need to do larger deals. “Otherwise the deals don’t move the needle,” he said adding that of late, Dundee Industrial and H&R have both done major acquisitions.
— Financing, be it debt or equity, is both cheap and easy.
— Some smaller REITS are candidates because they often trade below their intrinsic value. Accordingly, a sale amounts to a forced exit strategy given that in such circumstances, REITs/REOCs are essentially handcuffed in their ability to grow based on the dilution that would occur if they raised equity to purchase similar properties at current cap rates.
Using the acquisition criteria he developed, Abrams identified the likely buyers for the three REITs/REOCs he selected.
He named three potential buyers (Dundee Industrial, ARTIS and Granite) for Pure Industrial REIT, an issuer that has a “quality portfolio and relatively minimal insider ownership;” two potential buyers (Cominar and Canadian) for BTB which is trading at a 7% cap rate and which has 3% insider ownership; and three possible buyers (Chartwell, Leisureworld and private operators) for Regal which is trading below issue price and would be a nice “tuck-in acquisition” for Chartwell.