REITs Primed for More Takeouts

Even after the buyout of apartment owner Archstone-Smith(ASN Quote), industry watchers believe quality real estate investment trust stocks are still too cheap, which will lead to more privatizations and good opportunities for stock market investors.

Although debt deals for commercial real estate acquisitions are getting more onerous, there continues to exist a profound arbitrage opportunity between REIT stock values and the prices private-equity firms are willing to pay to take companies private.

"I don't think Archstone is a top," legendary real estate investor Sam Zell told investors this week at REITweek, an industry conference held in New York and sponsored by the National Association of Real Estate Investment Trusts.

Whenever Zell speaks, the real estate world tends to listen. Zell's sale of Equity Office Properties to Blackstone earlier this year has been called a sign of the top in real estate valuations -- a notion he disputes.

REIT stocks sold off heavily after the Equity Office deal, as hedge funds began shorting the sector on the belief the stocks' stellar run couldn't go any further. Since 2001, REITs have beaten the broader stock market every year.

During May, REIT stock prices fell to an 8% discount to their net asset values, or the private market value of their real estate. That represents the deepest discount since 2001, according to a recent report from Green Street Advisors analyst Mike Kirby.