Mark Decker Jr. is a managing director with BMO Capital Markets and head of the firm’s U.S. Real Estate, Lodging & Leisure Group.
Since the financial crisis, a number of companies have gone public as REITs, but very few listed REITs have been taken private. Are we close to seeing an uptick in privatizations soon?
We’re pretty well into the cycle. The debt markets continue to get deeper, and REIT securities have picked up the tailwind of marginal dollars from generalist investors chasing yield and momentum. Those dollars flow to larger, more liquid names. Smaller players or those with less institutional geography may become cheap on a relative basis.
In that scenario, privatizations become a lot more interesting. Especially when you consider that North American real estate funds have more than $125 billion of dry powder and there are fewer funds than at the prior peak. This means there are some huge funds out there that need to write big checks. Off-shore capital is another big element.
That said, we’re seeing more activity aggregating larger private portfolios and considering using REIT markets as an exit. REIT teams have a great sense of their asset value and they won’t want to sell at a discount to that.
What about the possibilities for M&A among stock exchange-listed REITs?
There will absolutely be some uptick here. But there has to be a compelling rationale: One plus one must equal more than two, and the quality of the real estate is everything. A big difference in multiples is irrelevant if the combination doesn’t advance the quality of cash flow and the strategy of the buyer.
Are there any trends or stories that you’re tracking in the credit markets?
The most interesting trend is the resurgence of credit appetite and breadth of sources.
The credit market is back. More than ever, REITs are accessing the investment-grade bond market. Banks are all looking to book assets. The commercial mortgage-backed securities (CMBS) market is back in a huge way. A number of non-traditional lenders have emerged, and they are smart and well capitalized.
All the conditions exist for some loosening of standards over the next 18 months. On the other side, there’s a massive wave of CMBS re-financings that will keep people very busy.
Do you have concerns about an asset bubble? Is it affecting REIT share prices, or will it in the future?
There is no question that the amount of liquidity and the lack of high-quality yield alternatives push real estate prices. The strength of the dollar and role of the U.S. as a safe haven bolster the air flow into the bubble. Share price valuations move because of those underlying asset values and how they move.
REITs have the benefit of aligned and professional management, and there is incredible relative liquidity available to shareholders versus owners in a private format. This cuts both ways, as you are “marked” daily. However, REITs as a group have demonstrated the ability to lead the real estate sector. Following 2008 and 2009, most public companies have gotten tighter on strategy and much more liquid on the balance sheet side.
This won’t change volatility around asset bubbles, but should position REITs well to capitalize on displacement if there is a “pop” in the bubble.
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