Those sleepy REITs can fool you. Just when you're ready to declare the sector dead and buried, a merry Monday brings real deals. The million dollar question is: Can one of the deals provide a spark to energize this dormant industry?
What a Difference a Weeks Makes
That's exactly what
is saying after announcing plans to acquire
, an Atlanta-based office-industrial REIT.
The stock deal calls for Duke to pay $1.7 billion for Weeks, including assumed debt, and creates a REIT with a market cap of over $5 billion. Duke will pay the equivalent of $30.10 per share for Weeks, which represents an 11.5% premium from Friday's closing price.
The deal caught many observers by surprise. "I had no idea," says Christopher Marinac of
, who follows Weeks from his firm's Atlanta headquarters. "Weeks had talked to a lot of people, but I didn't think a deal was imminent. I really thought they'd wait for a better market." Marinac rates Weeks accumulate, and Robinson-Humphrey has provided investment banking services for Weeks in the past three years. The company does not follow, nor has it done banking for, Duke Realty.
Still, analysts think it's a good fit.
"It's a textbook definition of a good deal," says Glenn Mueller of
. "It combines great management and properties with good diversification." The deal is especially good for Weeks, reducing the company's Atlanta concentration from over 50% to under 20%.
That may lead other REITs to consider partners to gain economies of scale. "This deal lends credibility to M&A activity in REITs," says Marinac. "Weeks is a good company that didn't have to sell. Yet, it saw clear benefits in becoming a larger, more geographically diverse REIT. Others are sure to follow."
Marc Halle of buy-side firm
believes the deal will force other REITs to look at strategic options. "I know many others are looking and re-evaluating their strategic plans," he says. "Every office/industrial company has to go back and ask how best to compete in this market. For many, it may mean merger."
Halle suggests that
Great Lakes Realty
are good candidates.
Marinac's short list of takeover candidates includes
, a company that many felt was on Duke's radar screen. "The market is giving Highwoods a vote of no confidence," he says. "It appears to be saying they need to find a partner and become a larger player."
Other midsize regional REITs that could benefit from a combination yielding a larger, more diverse entity include
Great Lakes Realty
as well as residential
REITs Summit Properties
United Dominion Realty
While stock prices currently keep many REITs from doing stock deals, Marinac thinks we'll see more REIT mergers soon. "It may be sporadic at first, but it will happen. These deals have a way of building on themselves."
Halle, however, warns that REITs need to have a reason -- other than simply girth -- to make a deal work. "What I don't want to see is companies merging for the sake of size," he says. "There must be a real strategic benefit. Two lesser companies combining doesn't do anything except create a large lesser company."
Patriot: New Life or False Hope?
In a long-anticipated announcement,
Patriot American Hospitality
reached a definitive agreement with an investor group to infuse $1 billion in new equity. The equity, one of two possibilities we explored in a column last
month, comes in the form of a 9 3/4% convertible preferred stock and provides Patriot with the capital necessary to settle $317 million in forward equity commitments.
The deal gives the investor group a 29% stake in the company initially, growing to over 36% after six years, representing substantial dilution to existing shareholders. In addition to the equity infusion, the company has reworked $2.45 billion in debt through
. Patriot will have $3.3 billion in debt with an average cost of 8.5%, well above the 7% mark, which reflects the cost of borrowing of most large-cap REITs.
made all but clear, the deal comes with a price: Patriot CEO Paul Nussbaum has been pushed out of daily duties, although he remains a member of the company's board. The company will also abandon its REIT status, merging Patriot into its
operating company and operating as a C-corp. A company spokesperson would not confirm the terms of Nussbaum's severance package.
While immediate implosion now appears unlikely, company officials still seem uncertain about their future strategy. Jim Carreker, Patriot's new CEO, seems to hedge the company's growth prospects. "While we will continue our growth strategies, it won't be at the pace of the last 18 months," he says. Carreker says the company will have to get its house in order before a new growth strategy is clearly articulated and accepted by investors.
And it appears the company will sell assets, possibly to once-spurned
. "There is no doubt we'll have asset sales," says Carreker. The targeted assets appear to be two divisions of the company,
and its European portfolio. Also on the block may be the company's interest in the
Dallas Wyndham Anatole
What's next? Analysts agree the work is far from done. "There's still a lot of pain left," says Brad Cohen of
, who maintains a trading buy on the stock. Sands has done no investment banking for Patriot.
"This should be worth a couple of points, but it is very dilutive to existing shareholders." Cohen also questions whether the "new" management has the discipline to steer the company in the right direction. "It sounds like if the high-yield markets open up again, you can expect Patriot to be in them. That's risky." While Carreker said the company will not tap the equity or debt markets in the next 12 to 18 months, he did confirm the company would refinance a portfolio of its escalating-rate debt with fixed, high-yield debt if the markets improved.
Adds Alpine's Halle: "There are still too many questions out there. While we're getting closer, we're not there yet."
Christopher S. Edmonds is the president of Resource Dynamics, a private financial consulting firm based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he welcomes your feedback at