Over the past two years, we’ve seen big-name investors – from institutional capital to private equity to alternative asset managers – buy up real estate investment trusts (“REITs”) left and right.
And on Monday, it happened again.
Blue Owl Capital (OWL), we just learned, will acquire Sila Realty Trust (SILA), a health care-focused net-lease REIT. The all-cash transaction prices shares at $30.38 for an approximate total of $2.4 billion.
That’s a 19% premium to where they closed last week. And yet, Blue Owl is still getting a good deal.
Ever since interest rates started rising in 2022, REITs have been trading on the cheap. And after waiting on the sidelines for so long, accumulating piles of money along the way…
Institutional investors are ready to make their merger and acquisition (M&A) moves.
It’s not as if they haven’t picked up REITs in the past. But, as the next chart shows, the sheer magnitude of public landlords being taken private is pretty impressive.
Source: Wide Moat Research
Which begs the question… Who’s next?
Identifying REIT takeover targets is a game I love to play – and I’m pretty good at it, too. I’ve successfully predicted acquisition targets months before they were announced. (You can read about a few of them here.)
So let me go on record once again in naming three more REITs that look tempting as M&A targets today. I’m not saying they will be bought up.
But if I were an institutional investor looking to expand my real estate holdings? I’d certainly at least consider the following possibilities.
Takeover Target No. 1: Cousins Properties
Cousins Properties (CUZ) is a classic example of a high-quality portfolio trading at an unfair discount. The REIT owns 22.2 million square feet of office properties in markets like Atlanta, Georgia; Austin, Texas; and Charlotte, North Carolina.
Most of these assets are well-situated in the growing Sun Belt. And all of them have benefited from long-term population and job growth trends.
For the record, these aren’t commodity office buildings. They’re largely Class A properties that can (and do) attract tenants even in challenging office environments.
Considering the events of the past seven years, that distinction matters. It means that while other office landlords continue to struggle in filling up space…
Cousins’ asking rents are 20% higher than pre-pandemic levels. And they’re 31% higher than their average Class A competition.
Source: CUZ Investor Presentation
Those points alone could easily attract a private buyer or institutional partner looking for Sun Belt office space.
So could Cousins’ balance sheet. The REIT has maintained relatively conservative leverage at 5.3 times net debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”). That’s the lowest such ratio in the office sector, significantly lowering any acquisition risk.
That’s not to say there isn’t any risk at all, mind you. The market has discounted the entire office REIT sector for years now, refusing to differentiate between those that are struggling and those that aren’t… a trend that could last a lot longer, for all we know.
Then again, that kind of uncertainty is precisely what can create M&A opportunity.
It certainly does here, considering how cheap shares of CUZ are – trading at $24.83 with a 5.2% dividend yield. That’s significantly below the $40-plus mark it hit in December 2021 before the Federal Reserve started raising rates.
CUZ’s price to adjusted funds from operations (P/AFFO) multiple is 14.7 times. And I believe shares could fetch around $29.90 by the end of the year, even if the company isn’t picked up.
That would mean a total return of 25%.
I also like the idea of getting paid that 5.2% dividend while folks continue migrating to the Sun Belt. I know I wrote about chasing yield earlier this week, but this one looks about as safe as could be.
Source: FAST Graphs
Takeover Target No. 2: FrontView REIT
FrontView REIT (FVR) is another name on my M&A watchlist for a very simple reason: It’s a net-lease player without the scale advantages that define long-term winners.
In the net-lease space, scale is everything, you see. Larger players like Realty Income (O) and VICI Properties (VICI) benefit from lower costs of capital, broader tenant diversification, and overall more efficient operating platforms.
Their smaller competitors, meanwhile, are left struggling to pick up the scraps.
FrontView, for its part, appears to be in that “in-between” zone. It’s large enough to be credible, but not large enough to fully compete with the majors. And that makes it a pretty good Goldilocks deal.
From an acquirer’s perspective, the appeal is straightforward. FrontView has over 300 long-duration leases with a 7.4-year average lease term and predictable cash flows.
Those assets would fit very well into someone else’s larger net-lease platform. The buyer could then generate greater value from the new properties with its lower cost of capital and general and administrative (G&A) efficiencies.
Perhaps not an institutional investor at all, but the aforementioned Realty Income?
There would be no concentration risk in that case, since FrontView’s portfolio is highly diversified. As shown below, its top 25 tenants represent 45.4% of its portfolio.
Source: FVR Investor Presentation
So what’s fairly valued as a standalone REIT can become immediately accretive inside a larger balance sheet.
Then again, FrontView might look equally attractive to a private equity platform. And I wouldn’t rule out a merger-of-equals scenario with another sub-scale operator like Essential Properties Realty Trust (EPRT).
Shares are now trading at $17.43 regardless, with a 4.9% dividend yield and an equity yield of 7.3%. I think they could fetch $19.50 by year’s end, which would mean about a 17% return.
Source: FAST Graphs
Takeover Target No. 3: Rexford Industrial Realty
REIT experts might be surprised to see Rexford Industrial Realty (REXR) on my list since it’s such a strong company. But here it is anyway.
Rexford owns 419 infill industrial assets in Southern California, one of the world’s most supply-constrained and high-demand logistics markets. Its portfolio benefits from limited new supply, strong tenant demand, and consistent rent growth.
Admittedly, the larger infill market in SoCal has seen declining rent. But that trend has been slowing – perhaps the early signs that a bottom is forming.
If that’s the case, Rexford could deliver outsized growth going forward.
Source: REXR Website
The reason why it could still make for an M&A candidate is because of scarcity value. The barriers to entry in Rexford’s neck of the woods are significant, so buying up an already existent company is one of the few – if only – ways to access it.
This REIT’s operating platform and local expertise are also valuable in and of themselves. Far from a collection of assets, Rexford runs a vertically integrated business with deep market knowledge.
Naturally, that all gives it a higher valuation, making it more costly to acquire. Rexford is currently trading at $37.44 per share with a P/AFFO multiple of 18.5 times and a dividend yield of 4.7%.
Then again, that’s still quite cheap compared to peers Prologis (PLD) and First Industrial Realty Trust (FR). They’re trading at 32 times and 25 times, respectively.
I believe Rexford shares could top $46 by the end of the year, regardless, which would mean around a 25% return.
Always Buy Quality Companies First and Foremost
The wave of REIT M&A is a real phenomenon that will probably only grow from here. Expect to see more headlines popping up as this year progresses concerning buyouts of varying sizes.
Maybe even involving the three REITs I mentioned above.
However, that doesn’t mean you should purchase every small or undervalued name just because it could be taken over. If it’s not, you’re left holding onto shares you might not actually want.
Now might be an exciting time of consolidation, with big money to be made. But I never purchase shares on speculation alone. (Not even when I’ve got the speculatory track record that I do.)
Focus on quality first, price points second, and then whether the stock in question can benefit your personal portfolio. When you do that, you should find yourself a well-rewarded shareholder.
If that quality company gets bought out along the way, then count it as the bonus it will be.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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