Legendary real estate investor Sam Zell thinks there are too many Real Estate Investment Trusts. Last week, in an interview with a Bloomberg Reporter, he said:
“There are also a lot of $800 million, $700 million REITs that have no scale, have no liquidity, and I think only obfuscate the clarity of the picture. And I would expect over the next 20 years we will have more and more consolidation as the REIT industry continues to grow.”
He apparently think only the big ones will survive, as he told the new service:
“Today anything under a couple billion dollars is not relevant and doesn’t have liquidity. And in the recent, the reason REITs exist is to provide capital to the real estate market. And you can’t provide capital if you don’t have liquidity.”
I think he’s probably right, and the divergence between large and small REITs shows in valuation. The larger REITs have seen large buying for yield seekers, ETFs and asset allocators that has driven the valuation of large REITS like Simon Properties (SPG) and Mr. Zell’s own Equity Residential Properties (EQR) prices up to 2 times book value and higher, while many of the smaller ones have languished and trade at discounts to their asset value.
If we do see a consolidation trend over the next few years as Mr. Zell and I think may happen, these sampler real estate companies could see much higher valuations and possibly be purchased by larger concerns.
Ashford Hospitality Trust (AHT) is an $865 million REIT that invests in hotels with a focus on the ownership of upper-upscale and upscale full-service as well as select service hotels in primary, secondary and resort markets. The company currently owns 95 consolidated hotel properties, which represent 20,176 total rooms — not to mention equity interest and other joint ventures.
AHT stock currently trades right at book value, and it yields a solid 4.55%. Management owns almost 20% of the shares outstanding, so they have a vested interest in seeing higher property values and share prices in the future.
Brookfield Properties (BPY) is a $1.5 billion dollar trust that currently owns approximately 300 office and retail properties covering approximately 250 million square feet, as well as 15,600 multi-family units and 29 million square feet of industrial space. BPY just launched a tender offer for Brookfield Office Properties (BPO) that, upon completion, will give it 114 properties totaling 85 million square feet in the downtown cores of some of the world largest cities.
BPY is likely to be an acquirer rather than seller going forward, but it should also see strong profit and dividend growth as global real estate markets recover over the next 5 years. The stock currently trades at just 75% of book value and yields 5.13%.
There very well may be a consolidation wave in the Real Estate Investment Trust sector over the next few years. Companies will either find ways to grow by acquisition or get bought out at a higher valuation by larger, more liquid competitors. Either way, it’s a win for investors who buy shares of smaller REITs at bargain prices.
As of this writing, Tim Melvin was long AHT and BPO.