Nonlisted real estate investment trusts raised $83 billion in the past decade. Now, as the U.S. real estate market rebounds and they face deadlines to return money to investors, the companies have emerged as some of the property industry’s biggest deal makers.
At least three of the biggest purchases of U.S. REITs announced in the past six months involved nontraded companies, according to data compiled by Bloomberg. Three of the companies listed shares last year, the most since at least 1990, based on data from industry tracker Blue Vault Partners LLC. Yesterday, Cole Holdings Corp., one of the largest REIT sponsors, said it would merge with one of its companies and go public.
Nonlisted REITs -- which aren’t traded on exchanges and are primarily marketed by brokers to individual investors -- are poised for more deals after opportunities to generate liquidity dried up during the recession, said Mark Decker, head of real estate investment and corporate banking at BMO Capital Markets. They typically have a lifespan of five to 10 years, meaning that the companies that raised almost $20 billion during the property boom in 2006 and 2007 may soon start seeking exits.
“All indications are that investment bankers will be very busy,” said Daniel Goodwin, chairman and chief executive officer of Oak Brook, Illinois-based Inland Real Estate Group of Cos., the largest sponsor of nonlisted REITs. “There will be mergers and acquisitions, there will be IPOs, and there will be secondary offerings.”
Nontraded REITs are typically managed by a founding sponsor such as Inland, which earn fees for services such as overseeing properties and making acquisitions. The REITs raise money through share sales and acquire properties with the proceeds, with a requirement to eventually return money. Until then, they are generally illiquid as investors collect dividend payments.
Inland American Real Estate Trust Inc., with $10.8 billion in assets, had an annualized dividend yield of 6.9 percent at the end of the third quarter, according to the REIT’s website. The dividend yield of the Bloomberg REIT Index of 129 public companies is 3.5 percent.
Inland American is among nonlisted REITs looking at exits. The Oak Brook-based company is working with investment bankers on options that would give shareholders the ability to get money back, according to a December investor presentation. Last week, Wells Real Estate Investment Trust II Inc., an owner of 82 buildings, said it changed its name to Columbia Property Trust Inc. and separated from its adviser, Wells Real Estate Funds, as a step toward listing shares or liquidating its assets by October 2015, as required under its charter.
“Nontraded REITs are actively exploring ways to return capital to their investors,” said A.J. Agarwal, a senior managing director at Blackstone Group LP’s real estate unit.
The New York-based company, manager of the world’s largest real estate private-equity fund, agreed in November to buy Apple REIT Six Inc., a nonlisted REIT that owns 66 hotels, for about $1.2 billion, including debt. The deal was the second-largest in the U.S. hospitality industry in the past year, after Blackstone’s $1.9 billion purchase of the Motel 6 chain, according to Bloomberg data.
Apple REIT Six was nearing the end of its life outlined in its prospectus filed in 2004 when the Blackstone deal was announced. The Richmond, Virginia-based company had planned to list stock, dispose of properties or merge seven years after its share sales closed in 2006, according to a regulatory filing.
Cole Credit Property Trust II Inc., a nonlisted owner of primarily single-tenant properties, took the tactic of becoming public through a reverse merger. It agreed in January to acquire Spirit Realty Capital Inc. in a deal valued at about $3.6 billion, the largest purchase of a REIT in the past six months, according to Bloomberg data. The new company will take Spirit’s name and keep its management.
Other companies may find deals within their own sponsor group. Last week, American Realty Capital Properties Inc. completed its purchase of nonlisted American Realty Capital Trust III Inc., becoming the owner of 692 properties in 44 states. The acquisition was valued at about $2.2 billion, Chairman Nicholas Schorsch said on a Dec. 17 conference call, according to a transcript filed with regulators.
Both had been managed by affiliates of New York-based American Realty Capital, which attracted the most money among nonlisted REITs in the first nine months of last year, at $2.08 billion, according to Cumming, Georgia-based Blue Vault.
Cole Holdings, a Phoenix-based nontraded REIT sponsor that oversees more than 2,000 properties, said yesterday that it will be acquired by Cole Credit Property Trust III Inc. The combined company would then pursue a listing on the New York Stock Exchange under the name Cole Real Estate Investments Inc.
Cole Real Estate Investments was the largest buyer of single-tenant properties over the past five years with $5.67 billion in acquisitions, according to Real Capital Analytics Inc., a New York-based property-research firm. Realty Income Corp. was the second-biggest, with $3.47 billion in purchases, and American Realty Capital was third with $2.61 billion.
“CCPT III will be able to increase its dividend payout and intends to now pursue the listing of its common stock to achieve greater liquidity and superior access to the capital markets,” Leonard Wood, chairman of the special committee of the REIT’s board, said in a statement.
Nontraded REITs that raised money in the boom period of about 2005 to 2007 generally proposed ending their cycle five to seven years after the shares were sold and are now looking at mergers or listings, said Decker of BMO Capital Markets in Chicago. The companies attracted $7.2 billion in 2006 and a record $11.7 billion in 2007, according to Blue Vault.
“Now that the recession is winding down, and the economy is picking up and financing is more available and the stock market is surging, we see opportunities that we didn’t see a few years ago,” Inland’s Goodwin said. “There’s going to be a lot more liquidity events.”
U.S. commercial real estate prices climbed 1 percent in February and are within 1 percentage point of their August 2007 peak, Green Street Advisors Inc. said in a report yesterday. The Newport Beach, California-based research firm primarily tracks REITs.
Inland American Real Estate Trust is “positioning each segment for potential listing, merger or portfolio sales in the future,” according to the December presentation. The company owns properties including office buildings, warehouses, apartments and hotels, and it is now focusing on student housing, retail and lodging, according to the presentation.
Another Inland REIT, Inland Diversified Real Estate Trust Inc., has scheduled meetings with investment bankers over the next 60 days to look at options for shareholders to be able to be able get money back, the company said on Feb. 19. The REIT, which owns shopping centers, apartment buildings, industrial properties and offices, had assets of $1.8 billion as of Sept. 30.
Columbia Property Trust said last week it completed a so-called internalization -- when a nontraded REIT takes on its own management and separates from its sponsor -- to prepare for an exit. The company is “well-positioned to advance to the next phase in the REIT’s lifecycle,” it said in a statement.
For REITs that opted to go public, returns have been attractive. Retail Properties of America Inc., an Oak Brook-based shopping-center owner that was an Inland-sponsored nonlisted REIT known as Inland Western Retail Real Estate Trust Inc., gained 72 percent through yesterday from its initial share offering in April. Healthcare Trust of America Inc., based in Scottsdale, Arizona, rose 18 percent since listing shares in June.
Another company that had been managed by American Realty Capital, American Realty Capital Trust Inc., began trading in March of last year. It gained 14 percent before Realty Income, a landlord of buildings with single tenants, agreed to buy the company for $3 billion. The deal was completed in January.
“This is a good time to list, it’s a good time to merge and it’s also a good time to sell your assets,” said Kevin Gannon, president and managing director at Robert A. Stanger & Co., a Shrewsbury, New Jersey-based investment bank.
While nontraded REITs from the boom years are seeking exits, new ones are raising money. The industry is estimated to have raised $10.5 billion in 2012, the most since 2007, according to Blue Vault.
“It looks pretty good for the foreseeable future,” Gannon said. “Some of these guys have really got it down to a science.”