Bradley Real Estate
is going private. And, as the rally in
REIT stocks continues, there is a good chance others may follow.
The Chicago-based owner of strip malls agreed Monday to be acquired by
Heritage Property Investment Trust
, a private REIT backed by the
New England Teamsters Trucking Industry Pension Fund
, for $22 per share in cash, a total of $1.2 billion including debt, and an 18% premium over Friday's close. The acquisition makes Heritage one of the largest owners of strip malls in the U.S., with 151 properties in 27 states. The stock rose 2 3/4, or nearly 15%, to close at 21 1/4 on Monday.
For Bradley, the merger will end its run as the oldest real estate investment trust, formed in 1961. After two years of a stagnant stock price and a lack of capital to grow, it makes sense for Bradley to throw in the towel. "It's been very frustrating for management and this is the result," says
analyst Richard Moore. "The inability to move the company forward in a capital-constrained environment led to the sale." Moore rates Bradley a hold and McDonald has not provided banking services in the past three years.
While difficult, most analysts feel the decision took the best interest of investors to heart. "It is a good move," says Carl Tash, principal and portfolio manager at
, a Los Angeles real estate investment management firm. "
Bradley chairman and CEO Tom D'Arcy is smart. He recognized it was nearly impossible to get the markets to recognize the value of his cash flow and he found a way to maximize the company's value." Tash notes the $22 price is above Bradley's historic range. And, analysts who cover Bradley say the bid represents a slight premium to the value of the company's underlying assets, estimated at $21 per share.
While the Bradley deal is news, the possibility that Bradley is on the front edge of a trend may be more profitable to REIT investors. Is this the beginning of a resurgence in the REIT consolidations? "That could be true," answers Ken Statz, chief strategist at
Security Capital Global Capital Management
, a Chicago-based REIT fund manager. "The cash flow yields are quite high and the quality of those cash flows is excellent."
While investors have recently warmed to the sector, many REITs remain attractive bargains. "The Bradley deal is evidence that despite the recent rally in REIT stocks, there is still a gap between where Wall Street prices these companies and the value of their assets," says Ritson Ferguson, president of
CRA Real Estate Securities
Clearly, Bradley will attract more attention to the retail sector, especially smaller community shopping center REITs that have struggled to grow over the past two years as sources of capital have eroded and consolidation in the grocery and pharmacy businesses has created uncertainty in the sector. Among the 27 REITs in Moore's shopping center universe, Bradley ranked seventh in market cap. "That leaves 19 smaller than Bradley that are likely looking at options," he says. "Already
Western Properties Trust
have said they are on the block. Others will follow." He says
Malan Realty Investors
are likely candidates. "We could see more consolidation in the shopping center world yet this year."
From a buyer's perspective, Moore notes that both private and public buyers are in the wings. For example,
, one of the largest shopping center REITs, recently said it will buy a portfolio of properties from
Phillips International Realty
through its private sister REIT,
Kimco Income REIT
, and has cash to burn. "Kimco says it has a billion dollars to spend in its private REIT," says Moore.
Another sector that may be prone to deals is multifamily REITs. "The predictability of cash flow makes apartments quite attractive as purchase candidates," says one
buy-side analyst. He suggests private investors may look to undervalued apartment REITs with properties in less-favored regions of the country, especially the Southwest -- Texas, Arizona, and Nevada -- and the Southeast -- Atlanta and the Carolinas.
"There are signs those markets are improving and investors may look to do deals before the prices go up." Three companies that may be shopping around, he suggests, are
AMLI Residential Properties
While deals are likely contemplated every day, one drawback to both traditional mergers of public REITs and public-to-private transactions is access to capital. While the Bradley deal suggests capital is available, it can be very expensive. "The one fly in the ointment is debt costs remain troubling for real estate on a comparative spread basis," says Security Capital's Statz. "If that corrects, a number of other deals are likely to come into place."
Those deals, however, are likely to be among midsize REITs, with deals limited to the "billion-plus" range like Bradley. Last year,
was close to a number of deals to sell or privatize the company, but could not find financing -- public or private -- to make the $4 billion-plus dream a reality. "Size will limit potential. Don't look for the very large deals anytime soon," says CRA's Ferguson.
Still, as the rally brings their stocks back into the spotlight, midsized REITs will be looking to any and all suitors to enhance their value. "The rally has middle-of-the-road REITs looking for exit strategies," says Cliffwood's Tash. "Whether it's public merger or public-to-private deals like Bradley, many of these companies are ready to cash out."
And, with attractive cash flows, a number of surprising players may be knocking on the door. "We have attractively valued cash flows in the mid-tier REITs," says Statz. "And there are a lot of private players we just don't know much about. That could make the rest of the year very interesting."
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Summit Properties, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at