Potential Record-Breaking Year for REIT M&A Activity

JLL, Chicago, reported real estate investment trust merger and acquisition activity is rebounding.

Steve Hentschel, Head of JLL M&A and Corporate Advisory, said the best year in this economic cycle for REITs was 2006, when M&A volume reached $103 billion. He noted REITs have enjoyed a strong run in 2021, up nearly 22 percent, “which is contributing to a rebound in M&A activity.”

REIT M&A activity totals $70 billion year-to-date as companies emerge from the COVID-19 pandemic. The JLL M&A and Strategic Transactions Monitor report said positive themes in the public capital markets space contribute to this M&A surge.

During the past year, REIT sub-sectors retail, office and hospitality underperformed in-favor of industrial, data centers and life sciences by 24 percent, but the trend reversed in late 2020. “With vaccine rollout and an improvement in the economy, these previously out-of-favor stocks are showing significant gains,” the report said. For example, the retail REIT sub-sector grew 46 percent year-to-date in 2021, with office at 16 percent and hospitality at 17 percent. Collectively, gateway multifamily, hotels, malls, offices, shopping centers and gaming REITS made strong comebacks, outperforming the previously in-favor sectors by 14 percent.

“We are seeing this cyclical rotation among the previously out-of-favor sectors, and it’s a positive message to broader real estate that everything is starting to improve,” said JLL Managing Director Sheheryar Hafeez. “The expectations of ‘back to normal’ economic activity is leading investors to bet on these sectors rebounding.”

Most major REIT sectors now trade above analyst expectations of net asset value, JLL said. Retail and hotel REITs have seen the highest positive change in their cost of capital. From February 2020 to June 2021, the REIT sector-level change in the premium to NAV shows retail, hotel and office outperforming other sectors.

JLL analyzed REIT data over the past 15 months and found recent REIT capital issuances point to increasingly attractive cost of capital. REITs raised more than $28 billion in equity and more than $88 billion in unsecured debt since February 2020 and have not been negatively affected by increasing interest rates. “As good inflation hedges, REITs are benefiting from rising inflation,” the report said. “This means the cost of equity and debt for REITs is likely cheaper today than what it was in 2020 and REITs are in a healthy spot to take advantage of markets re-opening to pre-COVID levels.”

Though the broader market has seen increasing capital market volatility driven by potential inflation, REITs to date have been “resilient performers with a more favorable outlook today than during the depth of the COVID-19 pandemic,” the report said.