REITs Too Hot to Touch

New York City office landlord SL Green (SLG) and apartment owner Home Properties (HME) are two of the companies that have shot up recently due to privatization buzz, but neither are likely to get taken out at current stock prices, says another veteran investment banker.

SL Green has jumped in price from $76 in early January to more than $100 now. Similarly, Home Properties has jumped from $40 to just under $51. Home Properties declined to comment on the takeout rumors, while an SL Green representative couldn't be reached.

"Until the market recalibrates, and some of this speculation premium comes out of stocks, it's going to be hard to get deals done," the banker says, adding that either stock prices need to drop or interest rates need to come down for deals to occur. "Whatever value has been perceived to be there has been taken out by the market. Anybody buying REIT stocks now will be disappointed," the banker says.

But based on SL Green's attractive New York City office buildings, the stock's fair value could be $120, says Robert Promisel, a principal with Adelante Capital Management, which owns SL Green shares. At $120, SL Green's portfolio is still being valued at less than $600 per square foot, Promisel says, which is approaching fair value for what the assets would fetch in the private market.

And just because premiums may be hard to come by, it doesn't mean REIT management teams have stopped asking their bankers to look at the possibilities of going private.

"Even when they're not doing it, investment bankers are doing it for them," says Jeff Barclay, managing director of ING Clarion Partners, which bought Gables Realty Trust, a residential REIT, last year for $1.6 billion. Barclay adds that the conventional wisdom in the sector has been that if a company has under $2 billion in assets, then it is better off being private.

Barclay, for one, expects at least another four REITs to go private this year.

There are "ample amounts of moneys for the proper deal to take a public company private," says Lee Neibart, senior partner with Apollo Real Estate Advisors, one of the country's largest private real estate investors.

REITs Taken Private Since 2005
REIT	Buyer	Sale Price (not including debt assumption)	Premium to stock price month before deal
CarrAmerica Realty	Blackstone Group	$2.6 billion	20.60%
MeriStar Hospitality	Blackstone Group	$1.1 billion	9.40%
Bedford Property Investors	LBA Realty LLC	$435 million	20%
Arden Realty	GE Real Estate	$3.1 billion	-2.30%
Town & Country Trust	Morgan Stanley/Onex	$929 million	35.20%
CenterPoint Properties Trust	CalEast Industrial Investors (CalPERS and LaSalle Investment)	$2.5 billion	12.40%
AMLI Residential Properties	Morgan Stanley	$1.2 billion	19.20%
Capital Automotive REIT	DRA Advisors	$2.2 billion	-3.10%
CRT Properties	DRA Advisors	$903 million	21.20%
Gables Residential Trust	ING Clarion	$1.4 billion	18.80%
Prime Group Realty Trust	Lightstone Group	$209 million	13.30%
Source: SNL Financial

"Every time there is a public-to-private transaction, there is always criticism of Sarbanes-Oxley and other things, which causes management to be not only unhappy about being public ... but feeling that in terms of shareholder value, now is the time to mine it," Neibart says.

Even though the Blackstone deal for CarrAmerica was the largest recent REIT privatization, Lustig, the Lazard banker, says there could be larger REIT deals. But a buyout is unlikely of a REIT with a market cap above "the high single digits," Lustig says. Private equity groups typically use 80% leverage on deals, and it's a lot easier to put together a few deals that require $1 billion to $2 billion of equity each rather than one huge layout.

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