REITs Too Hot to Touch

The REIT privatization wave has helped send the sector's share prices sharply higher, but that rally could cause the deal spigot to dry up.

A few months ago, the argument could be made that REITs' real estate portfolios were undervalued in the public markets based on where stocks were trading. That explained why private equity groups and other institutional investors were able to pay lofty premiums to take real estate investment trusts private and gain attractive real estate properties that could either be repositioned for the long term or flipped immediately for a nice profit.

There have been 15 REIT privatizations since the beginning of 2004, according to SNL Financial. After the Blackstone Group announced in early March that it would pay $5.6 billion for CarrAmerica (CRE Quote), fellow office REIT stocks began running up in price as speculators made bets on who would be taken private next. The recent bidding war for Town and Country Trust (TCT Quote) helped propel the apartment sector to lofty valuations. Year to date, the MSCI U.S. REIT Index is up about 13% on a total return basis -- much of it due to the privatization surge. ...