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REITs’ Low Cost of Capital Driving M&A Activity – Monthly Market Insights from Green Street Advisors
Posted under REAL ESTATE by admin
http://www.reit.com In the latest edition of Word on the beach: Monthly Market Insights from Green Street Advisors, Adam Markman, managing director and head of Green Street Consulting, discussed merger activity in the REIT market and the potential for future initial public offerings.
Markman said he expects transaction activity to continue in the REIT space as companies continue to trade at significant premiums to their unlevered asset values as well as to net asset value.
“As long as this is the case, [REITs] benefit from a huge cost of capital advantage relative to other sources of real estate capital,” Markman said. “This low cost of capital is the fuel that is driving the M&A engine.”
Beyond the cost of capital advantage, Markman said some transactions are being driven by a company’s management team realizing it needs to bolster an aspect of its business. For example, he said if a company anticipates that with fundamentals improving future growth will need to involve development, it may make a deal to bring in a team with development expertise.
On the IPO front, Markman said he is not anticipating a flood of offerings. However, he said there will be some deals that get done, and they will come from three primary sources.
“The first is niche sectors of the real estate market where we don’t currently have a presence on the public company side,” Markman said. “Second, it will come from companies that were privatized in the past that are really too big to be acquired and they will need to go public. The last source will be ego-driven transactions where management has a desire to be a public company.”
Regardless of which area a potential deal comes from, Markman said it is essential that companies be prepared before trying to test the market.
“It is very important that they get the structuring aspects of their transaction that are in their control really, really right. This includes things like corporate governance, boards of directors, how they deal with conflicts of interest and how they structure their balance sheet,” he said. “The market has shown no mercy if a company has strayed from the line.”
One other area in which Markman said he is seeing demand in his consulting business is from non-traded REITs in need of assistance in adapting the best practices from the publicly traded REIT space to better align the interests of their sponsors and shareholders.
By Carisa Chappell
Duration : 0:3:46
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