Publicly traded REITs have consistently traded at a discount to net asset value (NAV) since the beginning of April, according to SNL Financial. As of Dec. 14, the SNL U.S. REIT Equity Index was trading at a 6.4 percent discount to NAV.
In the retail REIT sector, Inland Real Estate Corp. (NYSE: IRC) traded at a 12.3 percent discount to NAV as of Dec. 14. In fact, IRC has been trading at a discount to NAV since early February of this year the data shows.
Against that backdrop, IRC announced Tuesday that it had entered into a definitive agreement to be acquired by real estate funds managed by New York City-based DRA Advisors LLC (DRA) for approximately $2.3 billion, including the assumption of existing debt.
IRC owns and operates open-air neighborhood, community and power shopping centers located in the central and southeastern United States. As of Sept. 30, IRC owned interests in 135 shopping centers (or retail assets) containing approximately 15 million square feet of leasable space.
Under the terms of the agreement, DRA-managed funds will acquire all issued and outstanding common stock of IRC for $10.60 per share in cash. Following the completion of the acquisition, Oak Brook, Ill.-based IRC will become a privately held real estate investment trust. (For more details of the deal, click here)
In a press release outlining the deal, Thomas D’Arcy, non-executive chairman of IRC, acknowledged the long-term discount at which the company’s shares have traded versus private market valuations and its shopping center REIT peers.
“The board unanimously believes this all-cash offer is the best course of action to address this valuation gap and provide our stockholders with strong relative value for their investment.”
Heartland Real Estate Business reached out to Jason Lail, manager of real estate research at SNL Financial based in Charlottesville, Va., to discuss some of the pressures facing today’s publicly traded retail REITs. What follows are his edited remarks.
HREB: Is this move by IRC a sign that we might see a new wave of retail REIT consolidation? In other words, with limited new buying opportunities (most of the quality properties in well-established markets have already been acquired) and only so much room to grow organically through repositioning properties and raising rents, are some retail REITs finding it difficult to live up to that mantra of continual growth?
Jason Lail: This is the 12th public equity REIT M&A deal announced in 2015. Of those deals, eight in total were privatizations where a private equity firm acquired the traded REIT, and the other four were REIT-to-REIT transactions. This deal appears to be more about IRC’s continued discount to NAV and less about the retail space overall.
Retail REITs are currently trading at a median discount to NAV estimates of 11.5 percent, compared to 14.1 percent for the remainder of the equity REIT space. So, the retail REIT space currently trades at a lower median discount to NAV than the remainder of equity REITs.
The median projected growth in funds from operations (FFO) for 2015 and 2016 among retail REITs is 6.5 percent and 5.7 percent, respectively. For the remainder of the REIT space, the median projected FFO growth is 9.1 percent and 7.8 percent for 2015 and 2016, respectively.
So, while the remainder of the REIT space is projected to perform a bit better with regard to earnings growth this year and next, retail REITs are projected to see continued earnings growth this year and next.
While there’s certainly the possibility that other REITs follow suit and are taken private, I don’t necessarily think this is unique to the retail space.
HREB: Is the exit by IRC from the public markets likely to become a more frequent scenario in the months ahead? Please explain.
Lail: If you’re referring to a REIT being taken private as it is more highly valued in the private market than share prices show currently, then I’d say that’s certainly a possibility. As I noted, of the dozen public REIT M&A deals announced in 2015, eight of those were privatizations. If REITs continue to trade at noticeable discounts to NAV, we may very well see other companies chase the additional value currently ascribed to REITs by the private market.
HREB: Did the current stock market volatility create a sense of urgency on the part of IRC to enter into this agreement?
Lail: It’s certainly possible. The Fed appears to be set to announce an increase in rates this week. If that comes to fruition, there could be a knee-jerk reaction in the near term that includes selling off REIT shares. While increases in rates may drive some yield-seeking investors away from REITs, in general, rising interest rates are indicative of a healthy and growing economy. (Indeed, the Federal Reserve announced on Wednesday, Dec. 16, that it would move up the federal funds rate by a quarter percentage point to between 0.25 percent and 0.5 percent.)
That would bode well for REITs in the near term, as increases in the number of jobs and the overall health of the economy drive demand for a variety of REIT property types, including office, retail and multifamily.
Looking at a longer-term time frame, if the delta between REIT yields and the 10-year Treasury yield were to continue to shrink, yield-seeking investors will eventually flee REITs in favor of the safer, 10-year Treasury note.
— Matt Valley