WASHINGTON, DC—Last week private equity fund Lone Star announced it would be acquiring multifamily REIT Home Properties for $7.6 billion, including its debt. The deal is a mammoth one even for Lone Star; in addition a side transaction will likely give multifamily housing REIT UDR a nice-sized increase in its holdings in the DC area market. Perhaps the most interesting part of the deal was it appears to be signaling a return to a structure that has not been seen in recent years: a public to private conversion of a real estate company.

Market conditions are ripe for these transactions, according to a new report from Fitch Ratings.

"Low cost capital is plentiful and debt underwriting standards have loosened," it noted in the report.

"With investment yields compressed globally, REITs do not need to trade at as wide of a discount to net asset value (NAV) or require significant growth for returns to meet go-private buyers' hurdles." The bottom line, it said: Liquid capital markets and lower return requirements are likely to result in more transactions.

At the same time there is a parallel but related story line unfolding that influence unsecured debt issuance volumes, Fitch Ratings also said -- a brewing change-of-control, or CoC, stalemate between issuers and investors that will influence unsecured debt issuance volumes.

This can be traced to Blackstone Property Partners' decision not to tender for the public bonds of Excel Trust after its acquisition announcement. That event, Fitch Ratings has said, has led to a stalemate between issuers and investors surrounding CoC provisions. "The non-tender caught investors by surprise, upending the belief that REIT bonds are protected from privatization," Fitch said. "Tellingly, there has not been a public issuance by an inaugural REIT issuer since the announcement."

Investors appear to unwilling to tighten spread expectations in exchange for CoC put language, it said.

Instant Insights /

Conditions Ripe for Return of REIT Privatizations

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