Fitch: US REIT, REOC Privatization Wave Could Hit Foreign Shores

NEW YORK--(BUSINESS WIRE)-- Recent acquisitions in Europe by funds affiliated with Lone Star and Brookfield Asset Management may portend REIT and REOC privatizations going global, according to Fitch Ratings. A material wave of public-to-private transactions for listed real estate companies could be generated by capital that is plentiful, inexpensive and less discerning from an underwriting perspective. These factors are fairly consistent globally.

Capital formation in the form of private equity fundraising and the CMBS market is reminiscent of that during the last privatization wave in the United States, during 2005-2007, when 30 US REITs were acquired representing $123 billion of value. Moreover, increasing real estate allocations at sovereign wealth funds provide a substantial incremental source of capital.

Low all-in debt capital costs are enabling investors to achieve targeted return thresholds. Fitch assumes investors' return expectations are lower for recent vintage private equity funds given global yield compression. Combined, target companies do not need to trade at as wide of a discount to net asset value or have as much growth potential as in the past for returns to pencil out, thereby increasing the number of candidates. More capital and more candidates should mean more transactions.

The presumed investment thesis for transactions in the US is markedly different than that of recent European transactions. The pending privatizations of multifamily REITs Associated Estates and Home Properties and recently-closed retail REIT Excel Trust by funds affiliated with Brookfield, Lone Star and Blackstone, respectively, are all transactions in which the target's assets are stabilized, cash-flowing and leverageable. Conversely, the acquisitions by affiliates of Lone Star and Brookfield of Quintain Estates and Songbird Estates Plc, respectively, reflect companies with structural complexity and long-term development opportunities, factors that often times are discounted and/or misvalued by the public markets.

Although just one factor, Fitch views companies trading at a discount to or near NAV as being more likely to see privatizations, as seen in this chart.

https://www.fitchratings.com/web_content/images/fw/fw-chart-20150730.htm

The report, "U.S. Equity REITs: The Privatization Fuse is Lit", may be found at the link above or on www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150730006386/en/

Fitch Ratings
Britton Costa, CFA
Director
US Corporates, REITs
+1 212-908-0524
or
Steven Marks
Managing Director
US Corporates, REITs
+1 212-908-9161
or
Jean-Baptiste Bouillaguet
Associate Director
EMEA Corporates
+44 203-530-1606
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
Fitch Ratings, Inc.
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Source: Fitch Ratings

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