"We have recently ratcheted up our takeout odds at a number of REITs," concluded a report released this week by Green Street Advisors, a real estate research firm in Newport Beach, Calif. In 2014, equity REITs posted total returns, including dividends, of 28% on average, outpacing the S&P 500's average return of 13.5%. But deals were a different story.
Between 2000 and mid-2007, REITs were on a tear, with 32 public-to-public mergers or privatization transactions getting done. But the spigot abruptly turned off with the recession of 2008: Deal flow plunged 75% over the past seven years, with only seven deals getting tapped.
Green Street predicts this will change in 2015 because of timing, valuations, a surge in activist investors pushing for change and insatiable demand for real estate from new capital sources such as sovereign wealth funds.
A key sign that deal activity is on the upswing has been recent moves by corporate raiders to shake up boards and force several deals in the sector.
Real estate titan, Sam Zell -- known as the "grave dancer" for his knack for spotting and buying up troubled real estate on the cheap -- led an investor team revolt at Equity Commonwealth(EQC) - Get Report (formerly known as CommonWealth REIT) in 2014. The activist investor group ousted the board and installed Zell as chairman. The REIT has since been selling off some properties and refurbishing others to bring up rents and revenue.
Green Street sees the Commonwealth deal as a "bellwether" for the industry. "Decades have passed since activists have been so successful in forcing a change of control that would otherwise not have transpired," the report said.
Then there's REIT industry veteran Jon Litt, a highly regarded former REIT analyst turned activist investor. He played a role in the sale of BRE Properties (BRE) to Essex Property Trust(ESS) - Get Report and the changing of the guard at Mack-Cali Realty(CLI) - Get Report , which saw long-time Chief Executive Mitch Hersh announce plans to step down in May 2015. Litt has also been rattling the cages at Pennsylvania REIT(PEI) - Get Report and Associated Estates Realty (AEC) .
Litt's presence "is a breath of fresh air in an industry where job security for underperforming CEOs is too high," said Green Street in its report.
Green Street believes the sector is ripe for deals. After all, "90% of the REITs we followed at the beginning of 2008 are still around," which defies traditional attrition rates. "Conditions now appear ripe for an end to the recent M&A drought."
REITs that went public during the initial public offering boom of the 1990s will likely be most open to takeout overtures, the report said. Going private transactions will likely surge as real estate becomes cheaper on Wall Street than on Main Street. With a flurry of capital sources, such as sovereign wealth funds, circling real estate for deals, those pricing spreads could come sooner rather than later.
Using valuations, performance and other factors, Green Street compiled a list of REITs likely to be bought over the next 18 months.
Topping its list is Associated Estates, with a 90% probability rate of being acquired. Pennsylvania REIT has a 50% rate, Mack-Cali a 40% probability rate and Macerich(MAC) - Get Report a 40% rate. Pennsylvania REIT, which recently traded close to $24, will likely get taken out at $27 a share, the report said. Mack-Cali, at $19, will likely see a takeout price of $24.25, while Macerich, at $85, would likely pull the trigger at $88 a share, the report said.
Others on the list with a smaller probability to be part of a merger include Campus Crest Communities (CCG) and Spirit Realty Capital(SRC) - Get Report at 30%. Rounding out the list of possible targets include CBL & Associates(CBL) - Get Report , Home Properties (HME) , Healthcare Realty Trust(HR) - Get Report , Coresite Realty(COR) - Get Report , DDR (DDR) , Paramount Group(PGRE) - Get Report , Washington REIT(WRE) - Get Report , Empire State Realty(ESRT) - Get Report and HCP(HCP) - Get Report .
TheStreet Ratings team rates EQUITY COMMONWEALTH as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate EQUITY COMMONWEALTH (EQC) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its increase in stock price during the past year, compelling growth in net income and reasonable valuation levels. However, as a counter to these strengths, we find that we feel that the company's cash flow from its operations has been weak overall."
You can view the full analysis from the report here: EQC Ratings Report
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.