Home Property Australia After a quiet year, REITs M&A primed for big year: Corrs

After a quiet year, REITs M&A primed for big year: Corrs

  • November 22, 2023
  • by Property Australia
Corrs expects to see strategic scrip mergers in 2024

Following no activity in 2023, the listed real estate sector is poised for a resurgence in mergers and acquisitions, according to a new report from Corrs Chambers Westgarth.

Corrs Chambers Westgarth anticipates that strategic stock-based (scrip) mergers among publicly traded real estate investment trusts (REITs) will emerge as a prominent aspect of the M&A landscape, with larger players expected to pursue consolidation in the sector while diversifying their asset classes.

Corrs Chambers Westgarth Partner, Real Estate, Lizzie Knight, said rising interest rates, limited access to debt, inflation and economic uncertainty are all contributing to an expanding valuation gap between bidders and targets, which might influence a take up of scrip mergers.

“The bid-ask gap is less of an obstacle in scrip transactions where both parties can look at the synergy analysis in connection with the transaction,” she said.  

“Scrip provides target securityholders an opportunity to retain exposure to the target’s underlying assets and, in the case of industry consolidation, participate in the synergy benefits expected to arise from the combination of the bidder and the target.  For bidders there is no cash outlay and so less exposure to the cost of debt.

“You could also expect consolidation as players hunt for scale – this might mean that some REITs will look for sales such as “block assets sales” as a way of rebalancing portfolios in a more difficult market eg disposing of regional centres to focus on CBD centres, consolidation of industrial portfolios by region or type.”

Ms Knight said bidders and targets are looking for additional ways to unlock value for securityholders and to bridge value gaps in public transactions.

“Bids are being rebuffed by target boards as being opportunistic and with the increasing cost of debt, bidders are unable to hit a target board’s view on value.

“The current view is that Australian REITs are trading at a discount to NTA (about 14 per cent, but with greater discounts for office and retail).  

“While securities are trading down, targets are holding to valuations. This is compounded by the cost of debt and macroeconomic uncertainty on both inflation and interest rates making the valuation gap a difficult environment for public takeovers.”

Over in the US public REIT market, Ms Knight said scrip deals have emerged as the dominant strategy.

“This is because public-to-public M&A can be viewed as a path to growth that allows a bidder and target to expand portfolios and scale up in a market where debt is more costly and difficult to access.  Utilising security price is more efficient when debt is expensive and hard to get,” she said.

“Some of the mergers are particular to the US REIT market – which is more expansive than Australia involving finance/credit REITS.

“However, those in the sectors which are well understood and of interest to the Australian market include Extra Space’s acquisition of Life Storage Inc (for scrip) to create the largest storage-facility operator in the US by number of locations and Kimco Realty’s merger with RPT Realty (who principally operate in the shopping centre sector).”

In its Public M&A 2024 Outlook report, Corrs Chambers Westgarth said we are unlikely to see take-private activity in the REIT space while debt markets remain constrained.

The firm expects that in 2024, REITs will increase their focus on establishing funds management platforms and seek third party capital mandates to generate incremental income streams.

The report also said more REITs are likely to act as development, property and investment managers, gaining access to a more competitive cost of capital source and reducing reliance on their own balance sheet.