Looming Interest Rate Hikes Will Speed Up REIT Consolidation

This year there have been five mergers in which a REIT has acquired another REIT.  The unprecedented consolidation of publicly traded REITs is likely to speed up, analysts say.

In its analysis of the recent $11.2-billion merger of Healthcare Trust of America and Healthcare Realty Trust, The Motley Fool cited several factors it believes are setting the stage for more shotgun weddings between publicly traded REITs.

“Conditions remain ripe for additional REIT consolidation, especially given the likelihood that interest rates will rise. REITs will likely want to lock in the rates on new debt while they’re low, which could spur them to complete a deal as soon as possible,” Motley Fool’s analysts said.

According to Motley Fool’s analysis, other factors spurring the wave of REITs acquiring REITs is a desire to increase scale, which can reduce the merged entity’s operating costs and cost of capital, and the surge in REIT equity values over the past year, which gives them “a valuable currency to make acquisitions.” 

“With more than 200 publicly traded REITs—including more than a dozen healthcare REITs—there’s ample room for additional consolidation. Given Healthcare Realty’s growing scale in the MOB sector, it could spur some of its rivals to join forces so they can reap the benefits of scale advantages,” Motley Fool noted.

The combination of Healthcare Realty and Healthcare Trust of America now is the largest healthcare REIT focused on medical office buildings, with holdings including 727 properties encompassing an estimated 44M SF of MOB space.

Another mega-deal that resulted in a merged entity positioned to increase its scale in a targeted sector was announced this week, Blackstone’s $12.8-billion acquisition of American Campus Communities (ACC).

The student housing REIT acquired by Blackstone includes a portfolio of 166 properties in 71 university markets. Bill Bayless, CEO of ACC, said Blackstone’s access to capital would enable the REIT to rapidly expand its footprint, GlobeSt.com reported.

The Blackstone REIT (BREIT) has closed two other mega-merger deals involving publicly traded REITs this year, both focused on the multifamily sector, including a $5.4-billion acquisition of Preferred Apartment Communities and a $3.7-billion acquisition of Resource REIT.

If REITs that are courting other REITs are planning to borrow money to finance these acquisitions, it looks like they’ll have to move fast on deal-closures to lock in lower rates on new debt.

Federal Reserve Chair Jerome Powell announced his support Thursday for a 50-basis-point interest rate hike next month. Powell signaled that the Fed, which announced a 25-basis-point increase last month, is moving to aggressively “front-end load” of as many as seven rate hikes this year to curb spiraling inflation.

Earlier this week, Federal Reserve Bank of St. Louis President James Bullard said the central bank needs to move quickly to raise rates to 3.5% this year and that it shouldn’t rule out rate increases of 75 basis points.