Blackstone, Equity Office bonds & strategies
interesting what will happen with this buyout, especially on the finance side of things.
http://www.bloomberg.com/apps/news?pid=20602007&s…
on a related note, do you guys think that take we will see siginificantly more deals involving private equity players/opp funds buying REITs? will this be conscentrated in the office sector or do you see it growing accross asset types?
what post acquisition strategies do you think will be most successfull (continue to manage as before, lever up on an asset level and asset manange, or split off portfolios and sell assets to the privat market, or other strategies)?
anyone have any interesting related links?
i think the acquisition trend will continue and we are going to see more big deals in coming couple of months. Fed rates r going to play a big role for PEF either to quit from the asset ealier or retain it for further appreciation.
Would love to comment on EOP, but can't....
Anyway, every market pundit out there has a different opinion about where REIT M&A is going. Here are my thoughts:
Practically every suspected M&A target in REIT-land has had a go-private premium baked into the share price for a while now. REITs as a whole were up 35% (total return basis) in 2006, and every single research analyst on Wall Street had a 0% - 10% forecast for the sector at the beginning of the year. We're now seeing entity-level takeouts in the sub-6% cap rate range...which is extremely low by any historical standard.
So if PE firms can't make money any longer with cap rate compression, rent growth is the key driver. The next round of go-private deals will likely include targets whose markets are expected to exhibit substantial rent growth in the near- and medium-term (SoCal, Manhattan, and Sunbelt states).
Office and retail benefit the most as rents rise in the near-term, but office has recently outperformed the other major asset classes (incl industrial, retail, and apartments)...so one of the others may be a better dark-horse bet. Apartments aren't going to see as much of a pop until Fed rates rise, as owning is still less expensive than renting. Industrial demand is a function of capital spending in the economy, which is a lot more expensive than merely hiring new people (as would benefit office REITs)...and a lot of people expect that the economy is headed for a recession. So firms may not be willing to increase capital spending dramatically.
Generally, of course, M&A is vastly dependent on the financing landscape, so when cheap debt dries up, so will go-private transactions. Likewise, there is still (still!) an enormous amount of institutional capital that has to be put somewhere, and that alone can support a continued strong M&A environment. It will take one, large deal that signals the top of the market (nobody's saying we're there yet), and then you'll see some of the institutional support deflate. They'll suddenly reduce stated allocations to real estate, and the magical goldilocks environment we're in right now will flee like a thief in the night.
With regard to the question about post-acquisition portfolio management...it all depends. With the bigger portfolios (a la EOP), typically the new owners have pruning in mind from the get-go--"let's shed the non-core markets/properties while the pricing is still good". With some of the smaller, pure-market-play REITs, the new owners are interested in either breaking into a new market, or they want to enhance their current footprint. Maybe they'll sell off more stabilized assets which have significant lease rollover coming up...but those decisions are asset- and owner-specific, of course.
But relinquo--you're in RE PE. You tell us!
Thanks for the detailed response Tirekicker.
I am in REPE but I don’t work at the $36 Billion level. Most of my acquisitions have been at the asset level and none of my bids have exceeded $1.5 billion for a single transaction (asset/portfolio). I am also more focused on Western Europe now; although I continue to do US acquisitions work. Most of my work is from the investment/financial side of things (not operational) so I can look at a lot of deals in a lot of different sectors and countries.
I find the Blackstone/EOP deal interesting not only because of its size but also to see what they do financially and operationally with the assets and infrastructure (employees, existing corporate entity, etc…). If they decide to prune the portfolio and sell off some of the non-core assets than I want to see how they will go about doing this and who will buy these assets (what kind of investors).
With REIT M&A I hope that we see a few more deals in other sectors (non-office). I think that it will be interesting to see how this is done and who does these deals (valuations permitting). Retail and the like need a lot more operational expertise than prime office assets. I wonder what kind of investors/consortiums will do these deals and what their approach will be to post acquisition management, i.e. will they get ride of a lot of assets and/or employees?
Will cross boarder deals increase in the public markets? It has already happened in the private markets at the asset level.
I also wonder if there is some value to taking assets private and gearing them up with private debt (is it relatively cheaper?) to very high levels to repay some of the initial investment and retain the upside.
I think that you gave a good overview. I agree with your sentiments about institutional allocations & cheap financing driving the investment environment. Interestingly, the plain vanilla type assets (e.g. NYC office buildings, with high occupancy let to high credit quality tenants) see a lot of investor interest (many bidders), but this isn’t necessarily the case with properties that need more work and operational expertise. The fundamentals are only just starting to look good in some markets whereas investor interest has been increasing for the past couple of years (e.g. NY office & hospitality markets as well as London office). The problem now is that most of this is already underwritten into asset prices (private and now public markets as well).
My thoughts on the future:
Investors have gotten extremely lucky in the past few years with yield compression and that is not going to happen in the next few years. I think the focus will be on growing NOI, either through rental growth or “Asset Management†which requires some operating expertise. I foresee a trend globally of some investors starting to “prune†their portfolios to get rid of secondary properties (in terms of location and asset quality) as spreads between riskier assets and prime assets have shrunk significantly. This is more apparent in Germany though. I personally can see this happening in the US and UK in the next 12 – 18 months or so, when investors start seeing which properties are able to achieve some of the rents that are being underwritten now. What’s the point of paying yields that are only 50-70 bps higher for lower quality product that probably won’t see any real rental growth?
Another approach is to look at assets that have an operational element, i.e. hotels.
Random thoughts: 1- I really think that there is a sweet spot for mezzanine type investments in well located RE assets that need a little bit of operating expertise to realise their full potential (i.e. “value addedâ€). The problem is that originating this kind of investment is difficult unless you are providing senior debt or equity in conjunction.
2- Distressed investing? When is the right time to start fund raising/putting together a team?
Relinquo,
Can you talk about how you made your way into REPE
sure. i studied a bit of finance & econ amongst other things at university and wanted an international career where i could flex my analytical muscles while also making things happen (i.e. decisions that matter). up until then i had had an internship at a technology firm.
i did a little research and ib with a firm that worked across borders seemed like an ideal career for me (a little specific, i know). the problem was that when i graduated a little over 3.5 years ago, investment banks weren't hiring in large numbers. i did manage to get some decent risk management, investment sales, finance job offers, but they didn't really fit in with what i was looking for. interviewed for a couple of corporate finance jobs, but didn’t get offers.
a headhunter that i interviewed with told me about an analyst/associate type role with a firm that invested internationally. she said that they focused on real estate, so i thought i'd give it a try.
the acquisitions associate who was there before i joined left to join an RE company and they wanted someone who had experience and good modeling skills. My competitors for the job were a couple of mbas. At that time RE wasn’t hot and it wasn’t a “sexy†job (is it now?)
i interviewed there on two separate days, the first was a mix of fit/technical skills (what is a cap rate, what does it depend on, how do you value RE, have you done any related finance coursework, etc...) with hr and an avp. the second was with a vp and the director. it was more geared towards fit. the director asked about my modeling skills and some irr questions. then the director gave me a sheet of paper with some info on it and showed me to a pc. they wanted a simple financial statement and a DCF with IRRs within half an hour/45mins. they also wanted it to look nice. i did it.
i got the offer and the rest is history. i’ve been promoted once and am looking at another one at the end of the month. so you can say that i sort of fell into it.
i’m thinking about the next step, either i continue, pursue ib, join another firm or go to b-school. we’ll see.
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