REIT Activity Picks Up Steam in 2010 After Five-Year Doldrum
Property transactions by publicly traded U.S. equity real estate investment trusts (REITs) declined dramatically over the last five years, according to analysis by data and analytics firm SNL Financial's real estate division. But REIT activity is picking up in the opening months of 2010, SNL said, and the sector is gaining steam. In 2005, publicly traded US REITs completed 6,351 acquisitions and 2,812 dispositions, compared to 360 acquisitions and 994 dispositions in 2009. The largest decrease in acquisitions was in the retail/other sector, which declined from 1,720 in 2005 to 65 in 2009, a decrease of 96.2%. The healthcare also saw a deep decline. In that sector, there were 103 acquisitions in 2009, compared to 402 in 2005, a drop of 74.4%. Dispositions totaled more than $88bn in 2007, put were down to $5bn in 2009 for all REIT sectors. “Although [mergers and acquisitions] M&A and high property valuations helped to drive transactions to high marks in 2005 and 2006, transactions experienced a rather dramatic decline in 2007, leading to a five-year low in 2009 as companies worked to reduce leverage and short-term debt maturities,” said Jason Lail, a senior analyst at SNL Real Estate. “With this focus on improving balance sheet fundamentals, most companies took part in minimal property transactions in 2008 and 2009.” As of April 30, 2010, property acquisitions increased 110.5% over the same period in 2009. Equity Residential (EQR) led all REITs with more than $770m in asset acquisitions. Healthcare REIT Inc.'s (HCN) 31 acquisitions was the most of any REIT during the first four months of 2010. Dispositions, on the other hand, were down 72% during the first four months of 2010. Developers Diversified Realty Corp. (DDR) led all US REITs in dispositions, with more than $445m in sales through April. The efforts haven't gone unnoticed by analysts. Moody's Investors Service analysts note in the June REIT outlook, that the industry is reverting to a landscape, reminiscent of the early 1990s, of companies specializing in owning and operating income-producing commercial real estate. "Most US REITs … are starting to recover from the effects of the protracted recession, moving 'back to basics' by focusing on liquidity, conservative capital structures, maintaining high quality unencumbered portfolios, efficient operations, and cost saving initiatives," Moody's analysts wrote. REITs were outperforming analyst expectations as early as Q1 this year, as a handful of REITs successfully priced stock offerings to raise capital. Most recently, American Capital Agency Corp (AGNC: 26.79 ()) raised $147m of proceeds to buy agency debt. Similarly, Invesco Mortgage Capital (IVR: 20.62 ()) saw strong Q1 results on multiple public offerings, prompting plans of another sale of 9m shares. According to the National Association of REITs (NAREIT), a trade group that represents the REIT sector, five REITs completed public offerings through May 31, 2010. During 2009, REITs raised $18.2bn in initial, debt and equity capital offerings. Of that, $7.9bn was raised in secondary equity common and preferred share offerings; $9.4bn in secured or unsecured debt offerings and $904m was raised in initial public offerings. NAREIT's all REIT index, a measure of REIT performance, was up 10.58% for the year through May. While the All REIT index measured total returns of 53.54% for the 12 months ending May 2010. That compares to returns of 20.99% in the Standard & Poor's (S&P) 500 during the same period. Write to Austin Kilgore. The author held no relevant investments.