In Part 1, we looked back at some of the changes and trends we’ve seen in the REIT industry, including more specialization, expansion into new types of real estate assets, and creation of REIT spinoffs for tax benefits. In today’s post, we’ll continue to discuss REIT trends we’ve noticed, but we’ll shift the focus to market activity in 2015 and looking forward.
Beyond the trends noted above, we’ve seen increased initial public offerings (IPOs) from REITs in the last year. Only three U.S.-based exchange-listed REIT IPOs were completed in the first half of 2014. Then, in November 2014, office tower-focused Paramount Group Inc. became the largest REIT IPO ever at $2.6 billion, and Store Capital Corp. had a $585 million IPO, stoking interest in the REIT market. After that jumpstart, we’ve noted at least seven REIT IPOs complete so far this year, including power line company InfraREIT’s $460 million IPO in January and Community Healthcare Trust’s non-urban healthcare facilities REIT raising $118.7 million in its May IPO.
Sears Oak Hollow Mall, High Point, NC (closed April 2012). Photo courtesy of Mike Kalasnik, CC BY-SA 2.0.
In a move it seems like everyone is talking about, on July 6, Seritage Growth Properties, the recently formed Sears Holdings REIT spinoff, raised $1.6 billion with a New York Stock Exchange IPO. Seritage reportedly then used a portion of that money to finance the $2.7 billion purchase of 235 properties from Sears Holdings (140 Sears stores, 84 Kmart stores, and 11 properties leased to third parties), along with Sears’ interests in 31 joint ventures with Simon Property Group, Inc., General Growth Properties, Inc., and The Macerich Company. Although the Seritage IPO was well received, many analysts question whether it will be enough to save a retailer that has been losing between $1 billion and $2 billion a quarter for the past couple years. While Sears has received a nice infusion of cash out of the Seritage transaction that should help for a short time, it is encumbered with $140 million a year in new lease payments at a time when its retail performance is only getting worse. Even before establishing the REIT, Sears had been subletting some of its space to other retailers such as Forever21 and Whole Foods; now, it seems like Seritage may accelerate that process.
Other companies may soon follow Sears’ example. Darden Restaurants Inc., operator of casual dining chains such as Olive Garden, LongHorn Steakhouse, and Bahama Breeze, has seen some of its chains struggle. In June, Darden announced that it would create a publicly traded REIT spinoff with about 430 of its properties by January 1, 2016. Activist investors have also pressured fast-food company McDonald’s Corp., MGM Resorts, and Dillard’s, Inc. department stores to consider the idea; MGM is analyzing the idea, Dillard’s has considered the idea but seems to have decided against it, and so far there have been no indications that McDonald’s is inclined to consent.
One of the same activist investors behind the Darden REIT announcement is trying to accomplish something similar at Macy’s. At the Delivering Alpha conference on July 15, Jeffrey Smith, who owns an undisclosed amount of the retailer’s stock and is the CEO of hedge fund Starboard Value, made a couple of statements that spread like wildfire. Smith claimed that Macy’s shares are worth roughly twice what they are currently valued at, and he said that Macy’s could boost stock prices by separating into two companies—one to operate its retail businesses, and the other a REIT to manage its real estate holdings. Macy’s Chief Financial Officer Karen Hoguet has said that the company frequently assesses various strategies to maximize value, including a REIT, but prefers to maintain close control over its real estate.
It should be noted that Starboard Value won a major proxy fight with Darden Restaurants last year, and Smith became chairman of the board when the entire Darden board of directors was subsequently replaced. The REIT spinoff was a key tenet of that fight.
Extra Space Storage, a self-storage facility owned and operated by a REIT. Photo courtesy of Wikimedia Commons user Greyhound4334, CC BY-SA 4.0.
In contrast to equity REITs, mortgage REITs don’t seem to be doing quite as well, perhaps because investors are nervous about the effects of potential interest rate hikes. Great Ajax, a REIT focused on nonperforming or underperforming mortgages for single-family residences formed by Aspen Capital, held an IPO in February that didn’t do as well as the company had hoped, raising something like $70.5 million instead of the anticipated $93 million. Since then, several mortgage REITs have either withdrawn or postponed their IPO plans. However, Jernigan Capital, a mortgage-based REIT that provides financing to self-storage facilities, successfully completed its IPO in March, raising $100 million.
One other trend we’d like to note among REITs is an increase in mergers and acquisitions. In Part 1, we discussed Penn National Gaming’s innovative move in forming REIT spinoff Gaming and Leisure Properties, Inc. (GLPI). Just last month, GLPI and Pinnacle Entertainment, Inc., a Penn National competitor, announced that they had reached an agreement for GLPI to acquire most of Pinnacle’s real estate assets and lease them back to Pinnacle in a stock transaction valued at roughly $4.74 billion. Pinnacle had already been planning to form a REIT spinoff by 2016. If the deal goes through as planned, it will close during the first quarter of 2016 and make GLPI the third largest publicly traded triple-net REIT with 35 casino and hotel properties across 14 states.
In January, another REIT spinoff mentioned in Part 1, the Washington Prime Group, completed its acquisition of Glimcher Realty Trust in a transaction valued at approximately $3.8 billion. The newly combined retail REIT is now known as WP GLIMCHER. Later that same month, Select Income REIT completed its takeover of Cole Corporate Income Trust Inc., an office and industrial unlisted REIT, for about $3.1 billion. In April, Blackstone Group LP, the largest private-equity real estate investor, announced that it had agreed to buy Excel Trust Inc., a shopping center REIT, for about $2 billion. On July 31, Blackstone announced that the acquisition was complete, Excel Trust stockholders will be cashed out, and Excel Trust stock will cease trading.
While activist investors have been behind some of these deals, sometimes the stockholders are not on board. In January, Chambers Street Properties and Gramercy Property Trust Inc. announced that they had entered into an agreement to merge, creating the largest industrial and office net lease REIT. The combined Gramercy Property Trust would have 288 properties in major markets throughout the U.S. and Europe and an expected enterprise value of approximately $5.7 billion. The merger agreement was expected to close in the fourth quarter of 2015; however, in July, a stockholder filed a class action lawsuit on behalf of investors. The plaintiff has claimed that the companies breached their fiduciary duties by agreeing to a merger that was unfair to the stockholders.
So, we hope after discussing some of these trends, we’ve managed to pique your interest in REITs. We expect to see continued interest in REITs in the near future, and don’t forget, the new Financial Industry Regulatory Authority (FINRA) rules to help investors in unlisted REITs are expected to take effect in April 2016.
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