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REIT IPO, M&A Activity to Increase, Deals to Get Larger in 2011

03/14/2011 | By Matthew Bechard

The REIT capital markets have continued to be a busy place in the first quarter of 2011. Jeff Horowitz, Head of Americas Real Estate with Bank of America Merrill Lynch, discussed the REIT capital markets during NAREIT's Washington Leadership Forum in Washington, D.C.

With news that privately held, formerly public Archstone is exploring a possible initial public offering, Horowitz said this reinforces the themes of private-to-public transactions, scale and deleveraging in the commercial real estate space.

"The public markets are a rare market that can handle a company of size," Horowitz said. "The public market offers liquidity. The public market offers growth capital. The public market offers these things because there have been great returns in our marketplace."

Horowitz said that over the next couple of years these themes will continue to play out and companies that are trying to decide whether or not to go public will choose the benefits of the public market.

While few potential IPOs can match the size of an offering like Archstone, Horowitz said overall the companies entering the public market in 2011 will be larger than those that came public in 2010. He added that he expects there to be a similar number, about 10, as last year.

"The reason the larger offerings have been delayed is that it takes a lot of time to get some of these large deals to the marketplace. Second, prices have recovered which enables these deals to occur at a price their sponsors like," Horowitz said. "As we see leverage coming to bear and maturities come, you are seeing companies think about exits."

On the merger and acquisition front, Horowitz said he is seeing companies gearing up for real scale activity, and the public market is very willing to embrace that.

"The belief of an investor today is that we have seen a recovery and we are bouncing off of a bottom," Horowitz said. "If we are bouncing off of the bottom and we are about to see rental growth, we are going to see that translate into real funds from operations (FFO) growth. We will see that translate into dividend growth. As a result, we are seeing funds flow into the REIT sector to fund that type of activity."

Horowitz said he expects to see a large number of these types of transactions over the next 12 to 24 months, and he anticipates the REIT sector to double in size over the next few years.