Soaring Yields Strand REITs In M&A No-Man’s-Land

Treasury yields surging past 5% are shaping the REIT landscape, pulling dealmaking into a slowdown. 

With the 10‑year sitting at levels last seen in 2002, REIT executives and analysts say the cost of capital has climbed so fast that buyers and sellers can’t agree on pricing, creating a gap wide enough to stall acquisitions across nearly every property type.

REIT stocks are trading closer to their underlying asset values than they have in several years. The smaller discounts mean they aren’t cheap enough to become takeover targets, but they also aren’t valued richly enough to act as buyers, leaving the sector in a holding pattern until either rates stabilize or valuations diverge.

“Any big deal in this environment has to maybe be reset, put on pause,” Haendel St. Juste, a REIT analyst at Mizuho Americas, said last week after Mizuho hosted its annual digital REIT conference. “I met some REIT management at our conference that said all of the acquisitions that they’re doing are taking a pause.” 

The rising cost of debt is pushing buyers and sellers further apart, he said.

“Buyers want higher cap rates because their cost of capital has gone up, and the sellers aren’t really willing to sell at today’s price — they want yesterday’s price when debt costs were lower,” he said.

REITs on average are trading at a roughly 10% discount to their net asset values, a narrower gap than the 15% to 30% that defined the sector in recent years, according to REIT-focused research and advisory firm Hoya Capital.

That relatively modest gap between public and private market valuations is likely to put REIT M&A activity into a holding pattern until REITs either gain enough value to become buyers or see their shares fall far enough that they become attractive buyout opportunities, Alex Pettee, director of research and ETFs at Hoya Capital, said in an email.

“The question from here isn’t simply whether the 10-year goes higher. It’s whether public REITs hold their ground relative to private-market values,” he said.

A handful of major deals have boosted M&A totals even as total transaction counts remain relatively muted. AvalonBay Communities and Equity Residential completed a blockbuster all-stock merger in August that created a multifamily REIT with 180,000 units and a $69B enterprise value. 

Smaller but still substantial deals this year include the $10.5B all-stock acquisition by Public Storage of National Storage Affiliates Trust and the plan to combine Independence Realty Trust with Centerspace into a 44,000-apartment REIT with an $8.1B valuation through another all-stock merger. That deal is facing opposition from a minority shareholder that wants IRT to instead consider selling itself. 

At least a dozen other REITs have either merged with competitors or been taken private in the last 12 months, according to an analysis by Bisnow. The pace of deals is being held back by the macroeconomic landscape, said Seth Laughlin, the head of real estate strategy and research at Cohen & Steers.

“Predicting M&A is notoriously difficult — both from the macro and the micro — and I think there’s periods of times when it just seems obvious,” he said. “I wouldn’t say we’re in that time right now.”  

Interest rates need to find some semblance of stability before M&A activity accelerates, especially buyouts that take REITs private, Laughlin said. Public markets have too much homogeneity in pricing inside asset classes, and public-to-public deals don’t look attractive without more price divergence. 

The takeouts happening in the public markets this year are focused on adding scale to unlock value as opposed to value-add acquisitions. But Hoya Capital is tracking at least 30 REITs trading at discounts to NAV of at least 20%, and that public-private disconnect eventually can become wide enough to overcome rising interest rates, Pettee said.

“Higher borrowing costs by themselves argue for fewer buyouts because the financing math gets harder,” he said. “But a sufficiently large NAV discount can overwhelm that headwind. We saw this repeatedly over the last several years when public REITs were trading at 20%, 30% or greater discounts.”

Nine REITs with a market capitalization of at least $3B are trading at a discount to NAV of at least 30%, including two office REITs, Kilroy Realty and Vornado Realty Trust, according to Hoya Capital. Park Hotels & Resorts is just under the 30% threshold, while apartment REITs UDR, Vivmark Residential — the company formed by the AvalonBay and Equity Residential merger — and Mid-America Apartment Communities all trade at a discount to NAV of at least 22%. 

A handful of large REITs, especially in the healthcare and related sectors, are trading at premiums that give them competitive access to capital to make acquisitions of their own.

Healthcare REIT Welltower, one of the best-performing REITs this year, trades at around a 97% premium to its NAV, while American Healthcare REIT trades at a 56% premium and Ventas at a 35% premium, according to 2nd Market Capital. Senior housing REIT Janus Living trades roughly 35% above its NAV. 

“There’s higher yields in senior housing, so they’re still deploying capital and taking advantage of the pullback from private competition,” Laughlin said.

If public REITs are able to hold on to their valuations after the recent sell-off, they will still have stronger balance sheets and access to capital than much of the private market, Pettee said. If REITs slide lower, however, they could become attractive takeout options for operators in the private market, where repricing hasn’t happened as quickly as in the stock market. 

“That’s really the framework: Rates set the backdrop, but the NAV discount determines the flow of funds and the flow of assets,” Pettee said.