A yearlong plunge in real estate stock prices has sent the first ripples of consolidation across the REIT industry. In recent weeks, two mid-size real estate investment trusts, Bedford Property Investors Inc. and MGI Properties, announced plans to liquidate their real estate holdings, and a third, Franklin Select Property Trust, has said it is considering a corporate sale.
Analysts say the announcements could herald a flurry of merger and acquisition activity in coming months as REITs find it increasingly hard to raise capital and purchase properties.
"With the pullback in REIT prices, I think you are going to see it happen more and more," said Craig M. Silvers, senior analyst with Sutro & Co. in Los Angeles.
Bedford officials say they are considering a sale because they feel their properties have been undervalued on Wall Street.
"We think real property prices are at their highest," said Peter Bedford, chairman and chief executive. "If you sell, you can get a great dollar return, then return that to shareholders."
Bedford's stock had risen from a low of $5 after it restructured in 1994 to a high of $22 last year. But this year, stock in the Lafayette, Calif., owner of about 80 office and industrial properties has plunged about 16%. It closed Friday at $18.38 on the New York Stock Exchange.
Likewise, stock in Boston-based office and industrial landlord MGI also has lagged the broader market, edging up just 9% this year to $26.31, compared with a 17% gain for the S&P 500.
REIT share prices have been on the skids all year, creating a cool climate for equity offerings, a REIT's primary way to raise capital.
"There's just no appetite for [REIT offerings]," says Ralph Block, analyst with Bay Isle Financial. And without this access to capital, REIT officials say it is becoming harder to compete for properties.
So, Bedford plans to shed its operating properties and focus instead on its $150-million development portfolio.
Analysts are divided on who would be a likely buyer of these properties. Silvers thinks larger REITs that trade at greater multiples will be interested in buying companies like Bedford for stock.
But others think REITs punished on Wall Street will shy away from paying the shareholders a premium for these properties.
"I think REITs have been sent a message by the market, 'Don't be too aggressive in buying properties. Don't be the highest bidders,' " said Jon Fosheim, partner in Newport Beach-based Green Street Advisors. Fosheim thinks pension funds, insurance companies and other private investors are more likely candidates for portfolios like Bedford's.
Fosheim also stresses that a few mergers and acquisitions doesn't mean the ranks of the REIT industry are thinning.
"There are still twice as many IPOs as there have been consolidations," he said.