As 2021 comes to a close, a wave of mergers and acquisitions across the real estate investment trust (REIT) sector is showing no signs of letting up. In recent months, REIT shares have rallied, contributing to low capital costs relative to property valuations and allowing REITs to raise equity capital and fund M&A deals with the proceeds.
With an inflation threat underway, if you have considered entering the REIT arena, or you want to invest to raise capital for your business, now may be a good time to start –especially as real estate values are expected to increase as prices increase. The most obvious benefit to REIT investments is high-yield dividends, as REITs are required to pay out 90% of taxable income to shareholders (although, generally speaking, a number of REITs have temporarily suspended dividends in light of the financial impact of COVID-19).
All major REIT groups seem to be contributing to the M&A boom. Two select groups are highlighted here:
Office REIT Groups
Initially, many companies walked away from office space in the months after the initial pandemic shutdown, as employees began to work from home and employers saw that productivity remained high in the remote environment. With a cultural shift of working from home, office vacancies remain high, and many tenants continue to struggle, both of which impact office revenues. But well-positioned office REITS such as Kilroy Realty (NYSE: KRC) and Cousins Properties (NYSE: CUZ) have been able to complete aggressive acquisitions of office buildings. The result: Office REIT groups are expected to reach more than $10 billion of acquisition activity in 2021.
Apartment REIT Groups
Despite the initial impact of the pandemic, apartment REIT groups are surging across almost every region, especially in the southern states. For example, Camden Property Trust REIT (NYSE: CPT) completed multiple significant acquisitions, and REITs like Independence Realty Trust (NYSE: IRT) and Steadfast Apartment REIT (OTC: STFR) have announced mammoth-sized mergers. In addition, this year, 11 of the nation’s largest apartment REITs, including CPT and IRT, raised their earnings guidance from their prior outlook – an indicator of this group’s strong rent growth and increased rental rates.
There is no denying that 2021 has provided a great environment for dealmaking. Debt is cheap right now and easy to obtain. These trends will likely continue into 2022, because the capital markets remain wide open for REITs to raise the money they need to continue scaling while reducing costs. As you head into the New Year, if you want to raise capital to scale your business, give REITs a serious look.