REITs Stray from Wall Street
And Continue to Go Private

Almost everyone involved in commercial real estate in the U.S. -- from company executives to big investors -- thinks it is still a great place to put money to work. Only problem is, a number of companies created to buy and operate commercial property are disappearing from the stock market.

Executives of real-estate investment trusts say they feel better-liked by private investors than by stock investors and some of the denizens of Wall Street, including securities analysts who the executives complain consistently undervalue their companies.

The REIT bosses may be on to something: When CarrAmerica Realty Corp., a Washington, D.C., REIT specializing in office buildings, earlier this week announced a buyout by New York investment firm Blackstone Group, it became the 14th REIT to go private since January 2004, and it sold for a record-setting price: Blackstone is paying $5.6 billion, the largest-ever REIT privatization in dollar terms. Offering $44.75 a share, the investment firm is paying 18% above the company's market value in mid-February, when deal rumors circulated.

That lofty price tag comes after a string of other deals to take public companies private. In December, General Electric Co., of Fairfield, Conn., agreed to pay $4.8 billion for Arden Realty Inc., an office REIT in Los Angeles. Seven additional REITs have disappeared from the market during the past two years because of mergers with other REITs.

The privatizers aren't done. One investment bank predicts at least an additional six REITs will be taken private this year. Nor are the mergers finished: Tuesday, two REITs that buy and operate self-storage warehouses, Shurgard Storage Centers Inc., of Seattle, and Public Storage Inc., of Glendale, Calif., announced a merger.

REITs aren't in danger of becoming extinct. There were 197 REITs in the U.S. at the end of last year, according to the National Association of Real Estate Investment Trusts, but that is down from a peak of 226 in 1994.

In privatizing, some REIT bosses are criticizing aspects of the Sarbanes-Oxley corporate-governance law. Like executives from many other industries, they are upset with a provision of the 2002 law that requires companies have systems in place to prevent financial snafus and shenanigans.

"Why have to deal with the SEC [Securities and Exchange Commission] and have to meet your numbers if money is washing around and flooding all opportunities?" asks Melvin Keating, who served on the board of Price Legacy Corp., a REIT that went private in 2004. "Why do it to yourself?"

The long answer to Mr. Keating's admittedly rhetorical question is that many property moguls had no choice: After the real-estate market crashed in the late 1980s, banks weren't keen to lend to the industry. Many developers and investors found the only way they could get capital was to go public by converting to REITs, which trade like any other stock but also enjoy big tax breaks.

Yet one executive gripe trumps all others, because it hits REITs right where they live: market values. The stock prices of some REITs are below their net-asset values (assets minus liabilities), meaning that investors, often guided by analysts' research, think the REITs are worth less as companies than the total value of the properties they own. The stock-price discount to those values flies in the face of broad trends showing that most U.S. commercial real estate remains strong and has further upside than residential property.

"What's driving [the privatization trend] is discounted values on Wall Street versus Main Street," said John Lutzius, president of Green Street Advisors in Newport Beach, Calif.

Indeed, private investors flush with cash and looking for security are willing to pay for big real-estate portfolios. Blackstone bought out two REITs in 2005 and, in the past few weeks, announced plans to buy two more. In the CarrAmerica deal, Blackstone will gain, in one fell swoop, 285 office properties across 12 markets -- a portfolio that would take years to piece together.

Devin Murphy, Deutsche Bank's global head of real-estate investment banking, estimates that pension funds are trying to invest $60 billion in the commercial-property sector.

That kind of money could help eliminate the nominal bargains in the REIT sector. Consider Town & Country Trust, a struggling Baltimore apartment REIT. In December, the company said it had agreed to be taken private by an investment group led by units of Morgan Stanley of New York and Onex Corp. of Canada. A bidding war ensued, and the final purchase price rose considerably.

Wall Street has probably underestimated commercial-property REITs in some cases, said Paul Adornato, senior analyst at Harris Nesbitt. The private investors "are people with experience owning and operating real estate, for the most part," he said.

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