REITs Are Increasingly
Going Private Again

Luxury-apartment landlord AMLI Residential Properties Trust this week showed that there is something more alluring than having a ticker symbol. The real-estate investment trust was bought by an investment fund run by Morgan Stanley for $2.1 billion and will go private.

After a long cycle of U.S. real-estate companies going public, giving investors easy access to prime commercial real estate for the first time, a growing number of REITs are becoming private companies again. The shift is driven by rising costs of being a public company and the realization that private buyers will pay more for the company than stock-market investors will. Morgan Stanley Real Estate's Prime Property Fund is paying a 20% premium to AMLI's closing share price the day before the deal was announced.

Being private gives real-estate companies a freer hand to slug it out for deals in an increasingly competitive market.

Meanwhile, private real-estate firms flush with cash say that buying a REIT is a quick and economical way to put a lot of money to work.

"You have all of these factors combining to push money into real estate. At the same time you have more factors making it more challenging to be a publicly held real-estate company, particularly if you're smaller," says Dale Anne Reiss, who runs the real-estate practice for Ernst & Young, which audited many of the recent REIT deals' buyers and sellers. "An event like this presents an opportunity for investors and executives to cash out."

The privatization trend has taken off this year. Five major real-estate investment trusts with stock-market values totaling $10.9 billion have closed or plan to take their firms private in 2005, according to research firm SNL Financial. That is roughly four times the number of deals in the year before: three real-estate investment trusts valued at $2.6 billion went private in 2004.

Investors and analysts are speculating about the next REITs to go private. Two names on many lists are Arden Realty Inc., which owns office buildings in Southern California, and CenterPoint Properties Trust, which owns industrial buildings in the Chicago area. Both stocks have jumped recently. Arden and CenterPoint declined to comment.

"There's definitely a recent trend of going private deals," says John Lutzius, president of Newport Beach, Calif., research firm Green Street Advisors.

In this highly competitive real-estate market, REITs realize that they often can grow more in the private markets than in the public markets. REITs are spending more money on compliance issues like Sarbanes-Oxley. At the same time REITs risk the wrath of their investors if they load up on debt or get involved with riskier development deals.

"If you run a public company and you're finding it very difficult to grow through acquisition, you're finding it difficult to find justifiable development alternatives and if you think that you could get a top value for your company, it's the right time to sell," says Peter Bacille, global head of real estate and lodging investment banking for J.P. Morgan Chase & Co., which advised AMLI.

Buyers of publicly traded REITs are eager to make more of these deals because they say that they are buying real estate at a bargain compared with the prices they are paying for individual buildings or small portfolios of properties from private owners. New York-based DRA Advisors is closing on its second purchase of a REIT in the past four months. Executives hope that they win more deals. DRA partner Paul McEvoy believes his firm's purchase of office REIT CRT Properties Inc. for $1.7 billion was a steal.

"We thought we were at a price that was at a discount to what those properties would trade for in the private market," Mr. McEvoy says. The firm's second REIT purchase, Capital Automotive REIT, which owns auto dealership properties, has yet to close.

Investment firm ING Clarion, which bought Gables Residential Trust for $2.8 billion, defended the high price that many firms are paying. Its most recent deal gave it a portfolio of luxury apartment buildings in improving markets.

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