Comments by:
Merrie Frankel
VP and Sr. Credit Officer
Moody's Investors Service
New York, NY

Certainly the M&A pipeline has been packed of late. Sizeler is about to close; Kimco just nailed Pan Pacific; and, of course, the $2-billion M&A gorilla, Trammell Crow and CB Richard Ellis, kept industry tongues wagging all week long. Last week's Feedback Poll didn't treat the mega-merger trend kindly. Some 65% of our poll takers think they're not good for the industry. They have some fuel for their fire in the ratings activities of Moody's, which issued negative ratings to a whooping third of the M&As rolling out this year. But commentator Frankel sees upside as well and shares her thoughts and the reasoning behind them, below:

"The results didn't surprise me at all. We've found on balance that these mega-mergers and privatizations, at least among REITs and REOCs, have been somewhat negative. Looking at the ratings actions we've taken, of the mergers that have been announced since January--and I'm counting 16--three to one have had negative ratings. Most of these have been public to private.

"The reason we have negative ratings on these is not because we don't like the transactions but that they tend to have higher levels of leverage and higher levels of debt. Those are the two things we don't like to see.

"And typically, these don't reverse themselves in any great fashion. Our ratings actions are not a blip. We're looking out over the next 12 to 18 months. Now, there are times we will put a negative outlook or review for downgrade, and as they sort out the financial aspects and the deal comes to fruition we could adjust the rating.

"Also, the economies of scale tend to be somewhat elusive. They do save a certain amount of money, but real estate is a thirsty product. You may be able to combine certain back-office functions, but you still need people to run the building and there's only so much you can combine.

"In the case of CBRE, we actually affirmed their stable outlook because we felt this was a positive addition to the company. It created such size and scale and scope and brought in certain functions where they didn't have a large presence previously. We felt that was a positive for the company. It actually gives CBRE a substantial slice of the global services market and clearly makes them the leader.

"There are other positives as well on the subject in general. M&As tend to be yield plays for private investors and put in their hands larger portfolios and a bulk-up in yields that they wouldn't have if they were buying properties on a onesies-twosies basis. Also, intra-industry M&As--like a Kimco acquiring a Pan Pacific--are often positive because it creates a broader size and scope.

"Right now, capital costs are so low, with the abundance of capital and funding sources, there is an impetus for institutional investors to fill their large allocations for property acquisitions. Many of these are timing issues, such as in office and lodging. As the timing passes, we wonder if M&As will start to wane."

Instant Insights /

Do M&As Help or Hurt?

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