REIT Run Goes the Distance

As an asset class, real estate has outperformed bonds and stocks on a one-year, three-year, five-year and 10-year basis, says Stephen Coyle, managing director of Citigroup Property Investors, which invests in public and private real estate.

Even though much of the funds for real estate investing are being raised on the private side, a lot of that money ends up in the market as REITs continue to be taken private.

Since the beginning of 2005, 14 REITs have gone private at a total transaction value of $35 billion, with average premiums of over 9% of the stocks' 52-week highs, according to SNL Financial. These figures exclude public companies' mergers, such as the pending $8.9 billion acquisition of Trizec Properties(TRZ Quote) by Brookfield Properties(BPO Quote) and private equity giant Blackstone Group.

Office owners Maguire Properties(MPG Quote) and Crescent Real Estate Equities(CEI Quote) are the latest companies exploring a sale of themselves, according to Barry Vinocur's industry publication REIT Newshound.

The wave of buyouts generally makes sense, Coyle says, because debt is cheap and there's a fundamental disconnect between REIT stock prices and private-market real estate transactions.

"There is a wall of money out there, and yields, or cap rates, have been falling very quickly in the private market, and in many cases, faster than [analysts'] NAV models," he says. NAV, or net asset value, is the way many investors calculate what a REIT stock is worth based on the underlying real estate value, rather than just a price-to-earnings metric. (As yield falls, prices rise.)