REPE taking REITs private in this market turmoil

Investment Analyst in PE - Other

With severe hits to edit values does this seem like a viable route that some well capitalized repe funds could undertake? Any reasons this would be a poor move?

Anyone know of any good examples of this happening before, would love to read up on some of these if possible.

Comments (20)

Mar 21, 2020

Brookfield's purchase of General Growth back in 2018 might be a good thing to read up on.

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  • Investment Analyst in PE - Other
Mar 21, 2020

Thanks I'll look into it

Mar 28, 2020
CREthoughts:

Brookfield's purchase of General Growth back in 2018 might be a good thing to read up on.

The jury is still out on this move....

Mar 21, 2020

Those REITs who are worthwhile to take private, they are not likely to let you do so given the below NAV valuation right now. It will be hard to find a good deal even in this low valuation environment (or I should say BECAUSE OF this low valuation environment).

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Mar 24, 2020

EDIT - Read Bolo Up's response

Agree (would SB if I could - Investors have to approve the deal. Can't be stressed enough that in order for a buyout to occur, current investors need to feel they are being fairly compensated or require injected capital (spiral to bottom scenario.

To color it further and someone correct me if I'm wrong, but just because REIT xyz is trading at $10, doesn't mean an offer of $25 is a viable opportunity. Major investors 1, 2, and 3 entered at $30 and share convictions the NAV is closer to $40/share. They also have a myriad of interests/own goals in managing their money. Now, if they come under pressure for whatever reason to disburse capital and cover their own costs (i.e. pension, insurance claims, etc.), there is a convoluted way this makes sense. But overall, when these public REITs trade lower, it's a good buying opportunity if you share that higher value conviction and have capital to put to wor, but that doesn't necessarily translate evenly to a good "buyout" opportunity.

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Mar 23, 2020

I wouldn't rule this out entirely- who knows the depths of the distress we could be headed towards- but there are some impediments. Two biggest ones I see are: (1) financing and (2) ability to find a willing seller.
(1) Financing: generally when you take a REIT private the PE firm replaces all of the senior unsecured debt with commercial mortgages. While the debt market isn't completely closed (to my knowledge at least) finding a bunch of high-leverage secured debt to put on properties which are taking (or at risk of taking) significant hits to their cash flow is going to be a tall order.
(2) Willing sellers: prices are beat up, but the market price isn't the takeout price. REITs, their investors, and their boards know where they were trading a month ago, and they're not just going to sign up to get taken out at a 20% premium to today's price when that's a 50% discount to NAV or their 52 week high.

Not making any predictions, but I could see a couple of exceptions. A smaller REIT (few billion or less) who hits a liquidity crunch due to debt maturities or cash flows drying up. In this case a PE takeout may be the best alternative to bankruptcy or severely diluting your shareholders by trying to raise capital today. Would likely need to be a smaller company because the PE shop would probably need to put up significant equity upfront due to point #1 above. My bet is that this would happen in a sector that was already trading at an NAV discount (retail?) because the pricing may be able to make some sense...

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Mar 23, 2020

This is the right answer. Spoke to a few bankers last week, and they said the same thing. That said, the guys that like shooting elephants are warming up the engines for this sort of thing.

  • Associate 1 in RE - Comm
Mar 23, 2020

Great post.

Where can I learn more about REIT take private deals? I never knew they threw on property-level debt! Seems counter intuitive.

Mar 23, 2020

https://behindthedeals.com/2016/12/28/how-blacksto...
This is a pretty good summary of BX's EOP deal in 2007. Doesn't go into too much specifics on financing though. I'm not that old so I'm not sure how different this was different in 2007 or previously, but REITs are relatively conservatively financed - roughly 30-35% debt to total mkt cap is typical for mid/large cap REITs. If you look at private markets, secured debt is generally available at significantly higher LTV (50-60%+ for office, 70%+ on multifamily). So in a take-private (like most LBOs) PE firms will increase leverage. I'll link some other research & articles if I can find them

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Mar 23, 2020

Is the lack of financing part even true in terms of affecting the economics? Lots of funds are compensated on unlevered returns.

Favorite Jon Gray quote: capital structure is temporary, the price you pay is forever.

Mar 23, 2020

Until the public health crisis and the surrounding financial market uncertainty is resolved, I doubt any deals will be announced or maybe even contemplated. The exception would be a take-out to prevent insolvency/bankruptcy (or financing within BK, but that won't be fast). Depending on how long this goes, hotel REITs or portfolios may need to be saved, just depends on leverage.

Again, hotel REITs have a lot to hold out for, as a recovery would fix a lot and most debt holders aren't likely to push for default under the current circumstances. In fact, there will probably short-term lenders who emerge to help.

Long-term, if REIT prices are consistently below NAVs, then yes, the PE shops will likely move in. There will need to be enough stability to establish values of the underlying real estate and available debt financing to make the transactions worthwhile. Neither will happen with so much uncertainty. The BOD of REIT will only approve a deal if its good for shareholders... meaning at prices close to NAV and above current trading prices substantially.

Mar 23, 2020

Anyone have any inside intel on how Blackstone's new REIT (the "BREIT") is going to fare? Based on headlines over the past few months, they have been investing heavily in hospitality and casinos. Seems like chasing that income return alpha may backfire now...

Mar 23, 2020

They were raising ~$1.5B per months in January and February and expect March to be ~$750m. Lion's share of that has been multifamily outside of MGM.

Thesis on MGM was that they thought they were buying at a 30% discount to market and then an independent appraiser would go in within 60 days of close and provide a market valuation which would bump the NAV 10-15%. Said differently, they thought they were buying the Bellagio at a 5.75% cap and the market value would be ~4.5%. When they did that deal, there were no such things as 5.75% caps... now who the hell knows. They'll probably be fine long term. They're looking at getting long hotels amid all of this distress and will likely be one of the few sources of liquidity in that market.

Mar 23, 2020

I don't think that's accurate. They have done some big ground leases underneath casinos. Those tenants are still paying rent

https://www.breit.com/performance
Only 7% Hospitality. Mostly multi family and Industrial

I doubt they'll keep pumping out the good dividends but they won't be hit as hard as other REITs. The portfolio is designed be yield focused / less risky

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Mar 28, 2020
JSmithRE2010:

https://www.breit.com/performance
Only 7% Hospitality. Mostly multi family and Industrial

I doubt they'll keep pumping out the good dividends but they won't be hit as hard as other REITs. The portfolio is designed be yield focused / less risky

you know who i'm curious about is BX's convention/venue platform. they were buying some big shit not long before 'large gatherings' halted, and i wonder how long before Americans are comfortable again with large gatherings. they seemed fairly new so hopefully their equity horizon/lifespan was set up to be long enough to hang through to the other side of this.

  • Investment Analyst in PE - Other
Mar 25, 2020
Mar 28, 2020
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